📈 Bridge Loans: What You Need to Know

This morning we will bridge the gap on this topic - Bridge Loans

If you are investing in commercial real estate, active or passively, you have probably heard of bridge loans.

Similar to a hard money loan for a fix-and-flip property, bridge loans are used by commercial real estate investors when permanent financing doesn't make sense or the project will not qualify for such financing.

I used to work as a multifamily underwriter for a commercial bridge lender. I can tell you that bridge lenders care about how they will get paid back!

When I worked for this lender, the bulk of my analysis on projects revolved around the sponsor, the business plan, and how we were going to get paid back.

Bridge lenders care less about the past performance of the project and are more concerned with your ability to execute the business plan to successfully pay back their principal.

Let's break down what these loans are:

Bridge Loans Defined:

Also referred to as a mini-perm, a bridge loan is a short-term loan provided to developers and value-add real estate investors. These loans are used to “bridge” periods when the project is not eligible for permanent financing.

Bridge loans can be an extremely valuable product to utilize but typically have higher interest rates to compensate lenders for the higher risk they are taking.

Why Use a Bridge Loan:

Sometimes a project may not qualify for permeant financing options. As an example, Fannie and Freddie (Agency) have strict standards for the projects they will finance. There are many reasons why the Agencies would choose not to finance a project. A sponsor could then use a bridge loan to acquire the project, complete the needed repairs, and then refinance into long term financing because it will now qualify.

Many value-add syndicators use bridge loans because it allows flexibility for the sponsor to exit at any time. Sponsors can buy under-performing properties, increase the NOI by making needed improvements, and exit when the timing is right.

Finally, HUD loans are typically a 6-9 month process to utilize. Unless you have a seller that is willing to wait 9 months for you to receive HUD financing (usually never), you will need to use bridge financing. Sponsors use bridge loans to acquire the property today, work through the HUD process, and refinance out of the bridge loan when ready.

*The refinance or payback of the bridge loan proceeds is typically referred to as the 'takeout.'

How to Model a Bridge Loan: 

Sizing:

Bridge loans will be based off loan-to-cost (LTC). Based on their underwriting, the lender will offer to extend credit on a percentage of your project costs.

The LTC will typically include the purchase price and any needed capex (costs to improve property). Some lenders may only choose to finance X% of the capex and not the entire budget.

Other costs such as fees, closing costs, etc. may or may not be included in a bridge loan. You will need to discuss with the lender to clarify exactly what is/is not included in this LTC calculation.

Interest Rate:

Bridge loans are most commonly floating rate loans. Meaning, the interest rate will based on an index (like SOFR) and then have a spread on top of that. The spread is the interest the lender is charging and how they make a return on their capital.

Example: 4.00% over SOFR might be a typical bridge interest rate for a loan. Meaning, 4.00% plus whatever SOFR happens to be at that given time.

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