Commercial real estate investors often find themselves in a tough spot: They need cash and they need it quickly, either to complete work on a newly acquired property or to finance the purchase of a new one. One way to make this happen is by using their existing building as collateral to get the money in their pockets quickly — a bridge loan to tide them over until they can secure permanent financing or positive cash flow. Here’s how long it takes to get a bridge loan.
What Is a Bridge Loan?
Usually, individuals or businesses in the real estate sector seek out these loans — also called interim financing, swing loans or gap financing — to cover their operating expenses such as utilities, rent and payroll, or the cost to make improvements to the property, or to carry them through a lag between the purchase of one property and the sale of another.
Similar to helping a residential home buyer who needs flexibility until the sale of the current house, commercial real estate bridge loans can provide some breathing room and peace of mind. This convenience comes at a cost, however, in the form of a higher interest rate compared to other types of financing such as a home equity line of credit (HELOC). Also, lenders usually only offer real estate bridge loans — worth about 80% of the combined value of both properties — to borrowers who have top-notch credit ratings along with low debt-to-income ratios.
Bridge loan terms typically last between 6 months and 3 years, just long enough for other sources of funding to become available. Bridge loans don’t take long to get.
What is a Bridge Loan in Commercial Real Estate?
Typically, a person would take out a bridge loan if they’re acquiring a property that either needs major repairs, or where there are many vacancies in the building, said Justin Piasecki, Managing Partner at Lev Capital.
“If somebody buys an older office building that the previous owner wasn’t taking care of and tenants were moving out so that it goes from a 100% occupied down to 60% occupied, you as the new owner will not be able to get permanent, long-term, fixed-rate bank financing because the property is not stabilized,” he explained. “As the new owner, you’ll get a bridge loan. It will usually be more expensive than permanent bank financing because it’s a little bit riskier and it’s for a transitional type property.”
Once the building has been improved, tenants rent out vacant space and the owners increase their monthly income with new leases, the bridge loan can be paid off or canceled.
“Bridge loans are traditionally one-to-three-year loans to allow you to execute your plan and then, upon stabilization, you can go and get permanent financing from a bank, a CMBS lender or another type of lending institute,” Piasecki added.
How Long Does It Take to Get a Bridge Loan?
Compared to taking out a traditional loan, bridge loans tend to have a quicker application process, approval and funding. Borrowers are happy to accept higher interest rates — usually about double the prime rate — and sometimes other fees because they know they can get fast access to cash flow.
Depending on the lending institution, potential borrowers can get approved in a couple of weeks or sometimes a couple of days, followed by financing that comes through within two to four weeks.
Bridge loans are very useful if you have to close quickly, Piasecki said.
“For example, in a situation where you’re buying property at auction, you win the bid and they give you 30 days to close. With traditional sales, you might have 60, 90 or 120 days to close, which gives you time to speak to a number of lenders or banks,” he explained.
“The process with banks takes longer because they’re very thorough. But with a bridge loan, you’re paying a little bit higher interest rate, but you’re dealing with a private equity firm or a debt fund that’s set up to move with speed. They provide a service that a bank does not: to close quickly on acquisition of an asset.”
What Can Cause Delays?
Of course, there are some hoops to jump through to ensure a smooth experience, Piasecki cautioned.
“There’s always something that can delay your application. Most lenders still order third-party reports such as appraisals and engineering or environmental reports,” he explained. “And if there’s a delay for some reason or something pops up when ordering a title report, that could just delay the closing.”
What You Can Do to Expedite the Process
One way to ensure things move along at a brisk pace is to get your paperwork together in advance.
“Borrowers can make sure they supply the lender with every piece of documentation they need in a timely manner,” Piasecki said.
“A lot of times, that means making sure their attorney moves at a rapid pace when negotiating the loan documents, and that they’re not disappearing for a week to go on vacation and then not having anybody pick up the paperwork.”
Factors That Affect How Long It Takes to Get a Commercial Bridge Loan
Getting a commercial bridge loan requires different steps that vary from lender to lender. While not usually as strict as traditional bank loans, various factors can impact the process of obtaining these short-term loans.
Lenders take a very close look at a company’s bottom line, because many small businesses are considered high-risk borrowers. Banks and other commercial lenders want to be sure that there’s enough cash flow available to repay the loan.
Most lenders will verify a business’s credit score before approving access to a commercial bridge loan and determining the terms that will be applied, such as interest rate and payback period.
Owner’s Personal Finances
Because many small businesses are owned by one person or a small handful of partners, lenders may also check each borrower’s personal credit history. They’re looking for red flags like past bankruptcies, defaults on loans or foreclosures.
What Is an Express Bridge Loan?
The Small Business Administration’s Express Bridge Loan (SBA EBL) program is offered as emergency assistance to help small businesses cover their operating expenses, such as rent, utilities and payroll in declared disaster areas.
Best Practices When Expediting a Bridge Loan
Potential borrowers should do their due diligence when researching lenders, and be ready to provide documentation.
Finding the Right Fit for Your Business
“Borrowers should consult with a broker advisor that does this for a living,” Piasecki recommended. “You wouldn’t hire an accountant that’s never done taxes before, so why would you hire somebody that’s never done partial real estate financing?”
Qualifying for a Bridge Loan Can be Different Than for Other Types of Loans
While some lenders look for high credit scores and good debt-to-income ratios, some will offer you a bridge loan based on whether a borrower had already qualified for a home loan (for single family rentals) or a second mortgage, for example.
Commercial Real Estate Bridge Loans Provide Flexibility
“Bridge loans are always used for properties or projects that are in transition or aren’t fully stabilized. They give you the time to execute whatever your plan is,” Piasecki said.
If you’re in this situation, consider a bridge loan, and connect with a brokerage you can trust.