What in the World are Commercial Bridge Loans and Why in the World Would I Ever Need One?

What in the World are Commercial Bridge Loans & Why do I Need One?As the name implies, commercial bridge loans are short-term commercial loans collateralized by real estate that serve as a bridge for you as the borrower that gets you to your next commercial property deal.  This type of commercial real estate financing permits you to alleviate  liquidity constraints and take full advantage of time-sensitive opportunities with speed and efficiency.

Commercial bridge loans provide you with temporary funds that bridge gaps allowing you or your Firm to execute some form of interim task. For example, if you have a balloon payment that is coming due on an existing commercial real estate loan, you could take care of that balloon payment until you secure permanent financing. Or if there is a very limited time frame during which your target commercial property is available, you could utilize bridge financing to purchase that property, then repay your bridge loan with funds from your permanent financing. So, essentially, commercial bridge loans are temporary commercial real estate financing vehicles that you can use for temporary financing until you improve, refinance, lease up, sell, or complete the subject property.

In order to compensate for their short-term nature and their greater risk factor, bridge loans are apt to have greater interest rates than permanent loans. Normally, commercial property bridge loans have terms that range from 6-12 months. Lots of commercial bridge lenders  allow you as the borrower to extend your bridge loan for an additional 6-12 months for a fee that typically ranges from a half-point to 2 points on a case by case basis.

Commercial property bridge loans are commonly repaid when the borrower places permanent financing on the property, after the actual improvements are done and new occupants sign their leases. As a result of their short-term nature, bridge loans usually will not have any prepayment penalties.

Here is a sample commercial real estate bridge financing scenario: Suppose you’ve got a 315-unit run-down apartment complex operating at a 60% occupancy rate in a really nice area under agreement for $10 million. Your thorough due diligence has demonstrated that the property will likely be worth $22 million after just $3 million in renovations that will take 7 months to complete, after which you will be able to increase the rents to justify the higher after renovation value. So, you collateralize your property to get a $13 million commercial bridge loan to cover the purchase plus renovations, carry out the work, lease-up the apartment complex to over a 90% occupancy rate, then 7 months later, you refinance the real estate with $22 million permanent financing usually in the form of a conventional commercial mortgage based upon the higher post-renovation valuation from which you pay off your original bridge loan in full.

So, commercial bridge loans offer you short-term commercial real estate financing when you need to have time to fill gaps with regard to your cash flow from operations while you finish such tasks as making improvements, locating new tenants, selling, purchasing, or refinancing real estate, then concurrently pay back your commercial bridge lender making use of a portion of the proceeds from any permanent financing that you receive.

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