Why Commercial Real Estate Investors Are Opting for Bridge Loans
Bridge loans are short-term loans on commercial property that are typically taken out for periods of a few weeks to three years. A bridge loan is used when you expect to refinance within a relatively short period of time.
Uses for Bridge Financing
This form of commercial real estate financing can be used to help avoid liquidity constraints and to pursue time-sensitive opportunities that might otherwise be lost. These loans are the answer for specific purposes, including:
- purchasing commercial real estate when a quick closing is needed
- buying time until you refinance, sell, improve, lease up or complete a property
- retrieving commercial real estate from foreclosure
- bridging cash flow gaps so you have time to execute an interim task
- capitalizing on a short-term opportunity before obtaining long-term financing
- dealing with a balloon payment on a loan while you obtain permanent financing
When short-term loans and quick funding are your needs, this type of loan can be your solution. You can repay your bridge loan once your permanent mortgage is obtained.
Terms for Bridge Loans
Rates: Rates on a bridge loan will vary by lender and the details of each commercial real estate transaction. To compensate for their greater risk and the short-term nature of the loans, bridge financing usually has higher interest rates than the rates for permanent mortgage loans. Lenders may also require a lower loan-to-value ratio and cross-collateralization. However, these loans are typically provided quickly and are made with relatively little documentation.
Collateral: Real estate is typically provided as collateral.
Terms: These commercial real estate loans usually have terms of from a few months to a year. Many commercial bridge lenders allow borrowers to extend these loans for an additional term for fees that often vary from a half-point to two points. A bridge loan may be either open or closed. With an open loan, the payoff date is not fixed. A closed loan has a specific date set for the payoff.
Repayment: A bridge loan is normally repaid when a permanent loan is obtained on the real estate.
Prepayment Penalties: Because of their short-term, these loans do not usually have prepayment penalties.
Use Bridge Financing When You Need Short-Term Real Estate Financing
In summary, commercial bridge loans provide short-term real estate financing when you need a bridge for cash flow gaps; when a quick closing is needed; when you need to buy time until you refinance, sell, improve, lease up or complete a property; when you need to retrieve commercial real estate from foreclosure; when you need to capitalize on a short-term opportunity; and when you need to deal with a balloon payment on a commercial loan while you obtain permanent financing.