When Do You Need a Bridge Loan?
A commercial bridge loan is a short-term financial instrument used by commercial property owners to bridge the time gap between when they get the loan and when they can get permanent funding. These types of loans provide financing to complete a transaction that doesn’t qualify or isn’t a good fit for long-term financing. Typically, some issue that precluded the capacity to secure permanent finance is overcome during this time gap. Bridge loans generally have high-interest rates, but provide flexibility and execution that other loan types do not.
How a Bridge Loan Works
Bridge loans are also known as interim financing, gap financing, and swing loans. Real estate owners can utilize them, and lenders can also customize these loans depending on the situation. These loans are short-term, usually lasting between one to three years with an interest rate higher than conventional financing. They are generally fast to fund and may be issued by banks, private lenders, and alternative lenders such as debt funds. Depending on the property type and situation, there are several different loan types, including purchase, refinance, cash out, and construction.
Common Loan Terms of Bridge Debt
- Property type: All (Typically with value-add components)
- Term: 1-3 years
- Interest rate: 9.00% – 10.00%
- Loan types: purchase, refinance, cash out, and construction
- Amortization: interest only
- Origination fee: 1.00% – 2.00% (Dependent on loan size)
- Non-recourse with standard carve-outs
- Borrower profile: Experiences, strong sponsorship
Bridge Loan vs. Perm Loan
Bridge loans are often easier to apply for, approve, and fund than conventional loans. However, in exchange for this ease, these loans typically have higher interest rates and expensive origination fees between one to two percent, depending on the loan size. Borrowers agree to these terms because they need quick and easy financial access. They are willing to pay high-interest rates because they understand the loan is for a limited period and intend to repay it soon and replace with low-interest, long-term financing. Furthermore, most bridge loans have no payback penalty.
Bridge loans are designed to be repaid in 12-36 months, ensuring the capital structure is appropriately aligned with the funding mechanism. In contrast, a permanent loan is a long-term mortgage financing option, typically lasting ten years or more, that often covers development expenditures, interim loans, building loans, and financing charges.
Advantages of a Bridge Loan
- Quick and high probability of execution
- Flexibility
- Leverage on higher risk investment scenarios
Why Should You Consider a Bridge Loan?
Following another Fed rate hike, the commercial real estate market is feeling the pressure of rising capital expenses and smaller credit amounts. With these higher interest rates and tighter underwriting criteria, the demand for short-term and gap lending solutions is becoming quite popular. In addition to their growing popularity, bridge loans are quick and have a high probability of execution. These loans accommodate lenders and borrowers and can be used as leverage on higher-risk investment scenarios. Short-term solutions are a persistent theme in the current state of the market. Several borrowers are opting to extend their bridge loans considering today’s market conditions in hopes that cheaper options will be available soon.
Conclusion
Borrowing fees have more than doubled in the last six months. Rising interest rates and the growing conviction that Fed policy will drag the U.S. into a recession are causing upheaval in financial markets. turbulence. Overall, the main advantage of a bridge loan is its flexibility. It gives the borrower short-term capital to continue doing business uninterrupted. Borrowers can conduct regular business operations while waiting for a much more significant funding source to become available. Investing in a bridge loan may help you navigate long payment cycles while waiting for additional finances.
