As the name suggests, a bridge loan is an interim step on the path to long-term financing. But the name doesn’t underscore the vital role that bridge financing can play in a commercial real estate investment strategy.
A bridge loan is opportunity financing. For savvy investors, bridge financing can provide a competitive edge when purchasing an underperforming property. Bridge funds can also be used to rehabilitate a property and unlock its income potential.
Traditional long-term lenders typically do not offer long-term financing on properties that are not already fully stabilized. The property must be at least 90% occupied and generating net operating income (NOI) sufficient to service the loan.
But a bridge loan doesn’t require maximum stabilization. Bridge financing allows an investor to purchase a new , unstabilized property, rehab a new or existing property, or build out to generate higher income flow. Once the property is fully leased and potential income becomes realized income, the borrower can look to Boulder Equity Partners convert the bridge loan into a long-term commercial real estate loan. Bridge loans are typically more expensive than permanent loans. But the cost of the bridge financing is outweighed by the opportunity to seize on long-term income potential.
Bridge loans work in a variety of situations. For example, a borrower owned two apartment buildings. One was fully leased, while the other was under renovation. The bridge financing allowed the borrower to complete the rehab and stabilize the second property.
Another one of our borrowers found a multifamily property at a great price. She was declined by her bank for long-term financing for the purchase because the property was not fully stabilized. She chose a bridge loan from Boulder Equity Partners to buy the property and is in the process of doing the rehab. Once the rehab and lease-up is complete, she can look to our long-term option to take out the bridge. Otherwise, she would have lost out on this investment opportunity.
But lease-ups are not the only reason to consider a bridge loan. Borrowers with tax liens face an uphill battle with long-term financing. A bridge loan can be used to pay off tax liens. This eliminates the need to liquidate an income-producing property. Once the lien is released, the borrower may be eligible for other options, like an SBA loan, or a long-term loan from Boulder Equity Partners.
Seasonal or expanding businesses and those hindered by temporary setbacks — like COVID-19 — also may benefit from bridge financing. Boulder Equity Partners can accept prior income statements before the temporary setback to show how the property is expected to perform once we move past the COVID economy.
Many multifamily property owners are offering rent concessions right now to avoid prolonged vacancies. These concessions have gone on for far longer than expected. Owners are risking late payments or defaults on their long-term mortgages. Some are turning to high-interest lines of credit to make ends meet. Moving into a bridge loan with an interest reserve to cover the payments if needed can prevent foreclosure or credit issues. When the property returns to profitability, the borrower can go back to a long-term loan.
One of our borrowers had taken out a construction loan to build out a multifamily property. He was issued a certificate of occupancy in February 2020, just days before the pandemic lockdowns, slowing the lease-up. The construction loan was expiring. Because the property could not be stabilized in time, a long-term loan was not an option. A bridge loan allowed the borrower to pay off the construction loan and continue the lease-up of this otherwise lucrative investment. Once the property is fully occupied and generating market rent, the borrower can move into a long-term option.
Although extensions are possible, bridge financing is temporary. The borrower needs an exit plan. To obtain a bridge loan, the borrower must show accurate projections for a property’s income potential. The potential income must be sufficient to service a long-term loan at the end of the bridge term. Once the income hits that mark, the borrower can take out the bridge loan with a lower interest alternative.
When preparing projections, borrowers need to consider the usual factors like cap rate, market rent per square foot, and rent comparables. Lenders also consider the borrower’s level of experience in the business, borrower liquidity, and net worth. Borrowers should be realistic with the projections before considering a bridge loan. If these numbers fall far short of the goal, it will be difficult to segue into a longer-term option.
Boulder Equity Partners offers bridge loans from $1MM to $100MM with competitive rates and loan-to-value (LTV) of 65-75% and higher for some asset classes. We offer interest-only options, with little or no prepayment penalty. Most commercial properties are accepted, from residential rental to office, light industrial, multifamily and mixed use. We can help our borrowers with bridge financing, and then move them into long-term commercial real estate loans.
We’d like to help you, too. As a nationwide lender for all commercial real estate loans, Boulder Equity Partners offers a wide range of loan programs, from low-interest long-term products to quick-close options, bridge loan programs that can be migrated to long-term, and hard money loans.
So, if you are considering financing for your commercial real estate project, remember this: a bridge loan isn’t about the long-term. It’s about unlocking the potential.
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