At times a Commercial Loan borrower may have a request that they think is relatively routine and in many cases a really good deal, but they find that they just keep getting turned down by traditional bank lenders. Although often times a borrower might have a good opportunity, that opportunity might not translate into something that matches the risk / reward criteria of a traditional commercial lender. In those cases a commercial loan borrower can often rely upon a commercial bridge loan to give them time to complete a project, and then they can refinance that project when completed. A bridge loan is often used in the following circumstances:
1) Reduced Note Payoff – sometimes a Bank either due to acquisition, due to a desire to move less desirable loans off its books, or due to a severe drop in the value of its collateral, will allow a commercial loan customer to do a discounted note payoff, where the Borrower can payoff the loan for an amount less (sometimes substantially less) that they currently own. For the Borrower this may be a great deal putting their commercial loan at a solid loan to value and enhancing the cash-flow and overall performance of their commercial loan. Unfortunately many traditional lenders either have a policy or just are not comfortable funding a commercial loan that will lead to another Bank taking a discount or even loss (even though no loss might exist because of an FDIC assisted loss share or because the loan was purchased at a discount). Because of this often times a bridge loan is used to fund the discount, either as a new loan or a discounted note purchase, which allows the borrower time to adjust its balance sheet and then go back to the traditional banking market six months to a year later with a clean performing asset and seek to refinance the bridge loan at a better more conforming loan rate at that time.
2) Tenant Build-outs – in today’s market commercial lenders are very hesitant to fund any sort of construction, especially if there is any speculative risk, for commercial properties. If a tenant needs to make some improvements to get some new tenants into a property, sometimes that commercial loan borrower just needs some short-term working capital. A bridge loan can fill this need providing the borrower with capital and flexibility and giving them time to complete and stabilize a property. Once completed and stabilized they can move the project to more traditional long-term financing.
3) Quick Acquisition or Note Purchase – most traditional commercial lenders cannot fund the acquisition of a property very quickly, and most will not fund a commercial note purchase. Sometimes it is advantageous for a borrower to purchase a note over purchasing a property in certain circumstances. A commercial loan borrower can utilize a bridge loan, which can typically be closed in 30 days or less, to quickly acquire a property or a note, taking advantage of a solid opportunity. Shortly after acquisition and stabilization, the commercial loan borrower can then work on getting more permanent financing in place with a long-term lender.
4) Construction Financing – Again, in many cases traditional lenders are hesitant to take on construction risk in today’s market. They worry about cost overruns, tenants not taking occupancy, failure of a builder to perform, etc. In order to alleviate some of these concerns, commercial loan borrowers can utilize a bridge lender to get the construction financing needed for their new project, whether it is an investment property, build-to-suit, or owner-occupied property. Once completed the Borrower can exist the loan via a refinance to a traditional lender, a refinance into an SBA loan program for owner-occupied, or a sale of the property if it is build-to-suit.
The above are just four of the main reasons a bridge loan might make sense for a commercial loan borrower, but there are certainly many other circumstances where use of such a product may apply. If you are seeking financing and failing to find it via traditional means, it might make sense to look at bridge financing. Often times it just takes a short amount of time to stabilize a property or fix a problem with a property, and then the property can be flipped to a more traditional bank loan.
Before we finish on this topic, I would like to point out that bridge financing is definitely more expensive then traditional bank financing. However, the cost needs to be weighed against multiple things. First, there is the opportunity cost. A commercial loan borrower needs to judge what they gain or lose by doing or not doing this transaction on a longer-term basis. Secondly, the financing is likely about twice as expensive as traditional bank financing, but that expense only lasts for as long as the bridge financing is in place. If the project can be refinanced in six months, then the difference in rate may be somewhat nominal (just a couple of points), over the potential longer-term income. Lastly, there is always a time component to money. If you can get a deal done today even though you had to pay slightly more to do so, over waiting and searching another six months or a year for a lender to complete that project, you may find yourself ahead of the game from a timing perspective. Again, there are many reasons and times bridge financing makes sense, so we recommend you consider it for your next project when you run into opposition from traditional lenders. You may just end up finding it is the preferred way to go.