An Introduction to Bridge Loans
Bridge loans are a very special kind of loan that offers you short-term
access to large amounts of money — enough to close a deal on a new
commercial property, even when under tight time constraints.
In short, bridge loans are interim loans (that is,
short-term loans, generally not more than 12 months long) that use commercial
real estate as the collateral for the deal. They're not intended to be a
substitute for any type of long-term financing, and while they're not needed
for every commercial real estate deal, these loans have often made all the
difference for those using them.
The most common uses of bridge loans are:
- Circumventing liquidity restrictions for businesses whose cash flow isn't allowing them to close a deal when they want to, and/or
- Executing an interim task (working on a balloon payment, making renovations to the building, etc.) before permanent financing can be obtained through a traditional property loan.
However, there are a few more things that borrowers should
be aware of:
- Bridge loans tend to have higher rates of interest. In the long-term, using them will probably cost more than going for permanent financing right from the start. Companies who can arrange for better financing from the start should do so.
- Unlike many other kinds of loans, some bridge loans can be extended. Expect to be charged an additional fee of up to 2% if you ask for an extension, but be sure to check for this option upfront, as it may be more difficult to acquire later.
- Owing to their short-term nature, bridge loans almost never have pre-payment penalties. Many companies choose to pay off the bridge loan through their permanent financing, since this tends to cost less in the long-term.
- Despite the speed at which they can be offered, bridge loans still undergo in-depth scrutiny. Having a clear business plan can help ensure that the loan is given, and may even result in a lower interest rate for the borrower.
Andy Jubelt has helped to arrange these types of
loans in many different circumstances, including for companies who didn't
realize that these options were available for meeting their needs.
Consider this scenario:
A 250-unit complex in a nice area hasn't been taken care of
in the last few years. In fact, most people would call it outright shabby,
which may have something to do with its 35% vacancy rate. The current contract
for the building is $12 million, but after $2 million in renovations over the next
six months, the building could be improved to a total worth of $20 million. At
that point, the rents within the building could be raised, and the improvements
would likely attract new tenants despite the higher prices.
A bridge loan would be used here to secure $14 million — the
contract plus the cost of renovations. The property itself becomes
the collateral for the deal, and once the renovations are finished, the bridge
loan is replaced by permanent financing for the full value of the building.
Andrew Jubelt can help arrange for both the bridge
loan and the permanent financing, helping to narrow down the real cost
of this technique for each individual case.
For more information about obtaining a bridge loan — including an expert opinion on whether or not it's right for you — contact
Andrew Jubelt at 212-231-9779 or send an email to
ajubelt@avant-capital.com. As a principal with Avant Capital Partners, Andrew
can help you get the connections and the financing you need for your next
purchase of commercial real estate.
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