The Bridge Loan Basics
What is a bridge loan? What differentiates it from a traditional mortgage?
Bridge loans are short-term loans often used as interim financing until a longer term solution becomes available to borrowers. Often referred to as hard money loans, these loans differ from a traditional mortgage in several ways, including:
Duration. While a traditional mortgage tends to be longer term, typical bridge loan terms do not exceed two years. These short-term loans are used until the borrower can obtain institutional refinancing or liquidate the property, thereby “bridging” their financing gap.
Amortization. Bridge loans tend to be interest-only loans, with little to no principal amortization. Typically the entire principal is due at maturity. In addition, negative amortization and zero-coupon notes may be an option.
Interest Rate. As bridge lenders take on additional risks when underwriting loans—including liquidity risk, default risk and limited access to information—bridge loans typically have higher interests rates when compared to the typical mortgage.
Timing and Flexibility of Execution. The higher costs attributed to bridge loans are partially offset, however, by the speed in which bridge lenders are able to provide the loan. These loans can usually be made available to borrowers within less than 30 days, due to the flexibility of structuring and reduced due diligence requirements. Alternatively, a traditional lender, such as a bank, may require up to 90 or more days to fund.
Focus on collateral. Further, bridge lenders are primarily focused on the value of the underlying collateral, rather than the creditworthiness of the borrower requesting the loan.
Why would a borrower obtain a bridge loan?
Borrowers—including experienced real estate developers and opportunistic investors—seek bridge loans for a variety of reasons. They may need to rush to close a deal, pull the property out of foreclosure, take advantage of obscure business opportunities, satisfy working capital needs, or they may even have trouble qualifying for a traditional institutional loan. The advantage of bridge loans, aside from their flexibility, is that they allow the borrower the comfort of access to capital— allowing them to focus on other aspects of the project.
Why is bridge financing valuable in the commercial real estate market?
Bridge loans serve to bridge the gap between a borrowers’ short-term capital needs and longer term financing. In the commercial real estate market, bridge loans are vital in many scenarios. Some property owners may have a mortgage coming due and need a new loan to keep the property operating (e.g., multifamily). Others may be focusing on avoiding foreclosure while they attempt to obtain refinancing or wait for the opportune time to sell their property, potentially at a premium. Further, many opportunistic equity investors will utilize bridge financing to acquire a distressed or attractively priced commercial asset, with the objective of rehabilitating a property with significant upside potential.
Ultimately, bridge loans provide the borrower with the flexibility they need to be able act quickly, so they can take advantage of market opportunities as they arise over the longer term.
Bridge loans are not for everyone. They are typically flexible, fast, and can overcome potential hurdles that would have otherwise been deal breakers in the case of obtaining traditional financing.
If you’d like to learn more about whether a bridge loan is right for you, please contact us at firstname.lastname@example.org or 305-749-9887.