When Should You Consider a Bridge Loan?

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.

This is the ideal use of a bridge loan — the loan can help you acquire the property as well as give you the capital needed to renovate or make repairs. Even the cost of marketing the property of new tenants may be included in bridge loans.

Using Bridge Loans Most Effectively

For many who are purchasing un-stabilized property, bridge loans can be used for acquisition purposes. However, there is an added benefit — you can also roll a rehabilitation loan into the bridge loan. This allows you, the property owner, to increase the value of your property, allowing you to attract new tenants.

Keep in mind, bridge loans, by nature are short-term. In many cases, a bridge loan will last only one year. Interest rates are generally higher than a traditional bank loan, but the criteria are less stringent.
Bridge loans are designed to provide you time. Generally, while many banks are reluctant to engage in bridge loans, particularly if a property requires rehabilitation, there are numerous portfolio lenders, and private lenders who will get involved.

Bridge to Permanent Financing
Fortunately, for most investors, many bridge loans offer a "permanent financing" option at the expiration of the bridge loan. The advantage to this is simple: once a property has been rehabilitated, is fully occupied, and is operating at optimal income capacity, the chances are the property has a higher value. This means you have gained equity while you were using the bridge loan.

While a bridge loan will be based on a lower loan-to-value ratio, and may require you to sign a recourse loan, in most cases, permanent financing will include a higher loan ratio, more lenient terms, and will be based in part on the income the property is generating.

Proceeding with Your Application

The sooner you apply for a bridge loan, the better the opportunity to close your loan and get started on rehabilitating a property. Generally, it is a good idea to review numerous proposals and see which one is most beneficial to your business interests.

When you are purchasing an un-stabilized property, make sure you have a full report of the current tenants, their rental or lease payment obligations, and a history of payments. This will help you when you apply for a bridge loan.

For properties which will require rehabilitation it is generally a good idea to request bids on the updates/renovations you are planning. These bids should be submitted with the bridge loan application so the lender understands time frames, and costs associated with rehabilitation.

Identify and Solve the Problem

Bridge loans may be the best option available for those commercial investors who are considering purchasing properties which are un-stabilized and need work. These loans are designed to "fill in the gap" until the property is repaired, and fully-occupied making it more attractive to conventional banks. Identify the upsides and downsides before proceeding:
  •       Bridge loan advantages — these loans are generally approved in a short period of time. They can provide the financing you need to help you purchase, and rehabilitate a commercial property that has limited cash flow. Payment terms may be negotiated to be interest only; allowing you to put more capital towards stabilization of the property.
  • ·         Bridge loan drawbacks — because these loans are short-term, you have a limited time frame to apply for a permanent mortgage. Loan-to-value requirements are generally capped at a lower percentage of the property value as well. Finally, the cost associated with bridge loans, including points, and interest rates, are higher than those of permanent mortgages.

Finding the right lender is important and it will require you to do a great deal of research before you agree to purchase a property that needs rehabilitation.