There may come a time when you’ve found a great commercial real estate project in the southwest, but you’re not ready to apply for long-term financing. You may need construction loans for capital improvements to make the property more attractive. Or, maybe you’re waiting on a current property to sell and need short-term financing for a new deal.
These scenarios, and others like it, can benefit from a bridge loan.
What are Bridge Loans?
A bridge loan, also called gap financing, is short-term financing typically used to fund construction and re-development. These upgrades may improve the units, increase the rents, and thus the property’s overall value, which can help secure better long-term financing. The purpose behind this type of loan is to bridge the gap between current needs and more long-term financing.
Typically bridge loan terms are short, lasting from six months to two or three years, depending on the lender. When considering if you qualify for a bridge loan, lenders will review the property’s current condition, overall market conditions for that area, and renovation plans and determine the property’s after-repair value.
These loans are also asset-based. Meaning a bridge loan is fully collateralized, usually by the property that’s the subject of the loan. However, securing the loan through a combination of other assets as collateral is also possible. In addition, because the loans are fully collateralized, a less intensive underwriting process helps close the loans more quickly.
With bridge loans in the southwest region, rates may vary depending on the size and scope of the project. Properties deemed riskier by lenders may have a higher interest rate, especially compared to traditional long-term financing options.
When to Use Bridge Loans
Bridge loans are typically used to acquire and improve a property to maximize occupancy potential, increasing value for other financing opportunities.
These are a few common scenarios where a bridge loan may be used for commercial real estate projects in the southwest:
- When you need a loan for purchasing, that prioritizes a quick close compared to a more traditional bank loan.
- New construction or renovation projects may need more time to maximize occupancy and stabilize before qualifying for long-term permanent financing.
- An existing property may require a touch-up to help get up-to-date on maintenance issues to help lease up the property to higher levels.
- Properties that are older and have gone without upgrades or improvements and need more significant renovation for future conversions.
- If you can’t qualify for traditional or permanent financing or construction loans due to credit score or lack of capital.
The Advantages of Bridge Loans
- Property owners can use bridge loans to renovate properties and take care of long-deferred maintenance problems to increase property value and attract higher rents.
- Bridge loans don’t have traditional lenders’ extended funding time frame; the loan can usually be closed in weeks.
- Commercial real estate owners will find more flexibility with bridge lenders; they may offer tailored solutions geared toward your project and business plan versus relying on your credit score.
The Risks of Bridge Loans
- Bridge loans typically charge higher fees compared to traditional commercial lenders. As a result, you will likely need to pay fees upfront and at the end of the loan, which could impact your cash flow.
- Since the property fully collateralizes a bridge loan, it could put the entire project at risk if something goes wrong or the loan can’t be repaid.
- Similarly, if you’re using other properties as collateral for the loan, those projects are also at risk if the loan is not paid on time.
What to Look for in a Bridge Loan
As you search for lenders for your bridge loan, there are a few key factors to consider:
- Ask your lender for their experience with bridge loans on your specific business type and plan.
- Review the lender’s interest rates, approval and closing timeline, terms, and all fees. Also, note if there are any pre-payment incentives or penalties.
- Ask about the draw funding process and the timeline for funds to help avoid project delays. For instance, in-house teams may move faster than third parties.
How to Secure Bridge Loans in the Southwest
If you’re looking to secure gap financing, Mandri Capital finds bridge loans for southwestern commercial real estate investments. Mandri Capital has deep experience in bridge financing, working with owners and investors in multi-family, office, commercial and retail industrial space, as well as hotels and motels.
We can have a confidential discussion on your pending project and financing needs. Please get in touch. Email Max Friedman or call 310-554-6401.