What is a Commercial Bridge Loan?
A commercial bridge loan is a loan for the purchasing of commercial real estate with a very short term. Commercial bridge loans are not meant to be a permanent financing solution; they are meant to act more as a stop-gap while waiting for other financing to come through (most commonly the sale of another piece of real estate, but sometimes another type of loan that has a longer processing time). A common application of this loan is purchase undervalued real estate, renovate it and then either resell or refinance it. Commercial bridge loans are high-risk high-reward relative to most conventional real estate loans. There is a lot of different information about how to do them, but we’ve gone through it and got the most important info for you.
A loans rates can refer to two different things. Sometimes it refers to straight interest rates by percentage of the loan per year. For most loans, it refers to the annual percentage rate (APR) which is a calculated by adding the annual interest rates with the average annual fee payment. Typically APRs give you a more accurate picture of the cost of the loan, but since commercial bridge loans come with flexible terms the best way to look at them is by looking at the interest and the fees separately. Most commercial bridge loans have an annual interest rate between 6% and 9% as well as a one-time origination fee of between 2%-6%.
Since bridge loans are short-term loans which hinge around a particular deal (either the sale of a piece of real estate or another form of financing), less emphasis is made out of the borrower’s credit score, and more is placed in the likelihood of that deal coming through. That said, most lenders ask to have a credit score of at least 650.
Because bridge loans are a significant risk to lenders, most lenders will ask for a significant amount of collateral, usually the real estate the loan is being used to purchase. If the sale, or the refinancing that you are planning to use to pay off the bridge loan, falls through and you are unable to pay back the loan within the agreed upon timeframe, the lender can seize that land, and you lose your down payment, whatever interest you have paid into the loan, and whatever value you have added to the real estate (renovations etc). So bridge loans should only be acquired when you are certain (or very near certain) that you will be able to pay them back within the time frame.
The most common use of a commercial bridge loan is to renovate an undervalued property. An example would be if there were a strip mall which was in disrepair with 40% of the store space unrented. The building, if it were in good condition, would be worth $2.5 million but as it stands it's being sold for $1 million, and the renovations would cost around $600,000. You can get a bridge loan to pay for the mall and the renovations (with a downpayment out of your savings) and then either sell or refinance the mall for $2.5 million. After a 2% origination fee and six months of interest, the cost of the loan would be about $1,680,000. This would leave the investor with $820,000 profit. That is, if everything goes as planned.
How to Get a Commercial Bridge Loan
The first step in getting a commercial bridge loan is finding the property you want to use it on. The situations in which it is wise to use a bridge loan are somewhat rare; there needs to either be some reason why you are profiting by acting quickly, or some reason why a conventional lender would not see the value of the investment. Typically either a property that is undervalued because of the need for renovation or a new location for a growing business that needs to take advantage of its momentum. After the property choice is established, you should prepare a solid business plan. Be prepared to answer questions like: “Why are you buying this property?” “Why Now?” “How much funding will you need for renovations?” “What suggests that these renovations will raise the value of the property?” Be as specific and evidence-based as possible in your answers. Also gather together all of your personal and business financial information. Once you’ve prepared yourself, you should compare financing options. Typically if you can find a conventionally that can finance your project, it will be more cost-effective than a commercial bridge loan. Even among bridge loans, there is a large variation, find the one which suits your needs.