If you are considering purchasing a property that is under-utilized, you are probably concerned about funding. A bridge loan may offer you what you need; bridge loans provide temporary financing until the property is fully utilized and you are collecting income. Here are some of the scenarios where a bridge loan can work:
John and Jeanette Carroll are considering purchasing an unoccupied 20-unit apartment complex. Four of the units have suffered extensive interior damage and cannot be rented until they are rehabbed. Additionally, most of the units need minor work; paint, new appliances, and floor refinishing. Because the unit is not currently occupied, they are unable to secure permanent financing; they also need the cash to rehabilitate the property before they can rent the units. This is the kind of a problem a bridge loan can solve.
Karen and Joseph Makhen recently signed a purchase and sale agreement for a strip mall. The mall has been vacant for several years; part of the reason for the vacancy is the roof needs replacement and the heating and air conditioning system is aging and should be repaired or replaced. Karen and Joseph have already found suitable tenants providing the property is upgraded. They understand how difficult it will be to get a regular loan; their best option is a bridge loan where they can roll the rehabilitation costs into the amount borrowed.
Lauren Neadreau is considering purchasing an office complex. The property has 20 available units for lease; although the property has been vacant for the last year. The current seller informs Lauren that in addition to landscaping work, the property needs upgrades including the electrical system, carpeting in the units, and the elevator needs repair. Because of the cost associated with these repairs, the property is selling for $75,000 less than its appraised value. Lauren sees this as a great deal, but is concerned about securing financing. Lauren talks to a private investor who recommends a bridge loan and explains how it could benefit her; pointing out that rehab costs may also be included in the loan amount.
Banks and Permanent Financing
Generally, if you are purchasing commercial property, bank financing may seem like the most sensible option. However, when a property is not fully occupied, you do not have the level of income necessary for typical permanent financing. An unstable property with limited income, one that is vacant, or lacks current income will not support a bank loan. In these cases, bridge loans will be a better option.
Bridge Loans for Property Stabilization
A bridge loan provides you, as a buyer the opportunity to stabilize your property. For example, let's assume you purchase a strip mall that has only 50 percent occupancy. The goal is 100 percent occupancy. However, before you can seek new tenants, you need to make certain renovations or repairs.