Key Fundamentals For Structuring A Commercial Bridge Loan

[Winston Rowe]

Key Fundamentals For Structuring A Commercial Bridge Loan

Basic Bridge Loan Structure:

Commercial real estate bridge loans are utilized for distressed and higher risk acquisitions, refinancing or repositioning properties, re-tenanted, improved or otherwise redeveloped, that traditional banks won’t finance.

The typical structure for a bridge loan: a low loan to value, higher interest rates than a conventional loan and a short term, hence the term “bridge”. This type of loan requires a clearly defined exit strategy for long term financing.

Acquisition/Purchase Bridge Loans:

When utilizing a bridge loan for the acquisition/ purchase of a distressed or higher risk property  a cash down payment will be required, there will be personal FICO standards and your business experience will be scrutinized by your potential lender.

New commercial real estate investors make the mistake of thinking that an appraisal or future completed value is the equity (down payment) into the purchase transaction if it is greater than the sales price.

This is never the case, here’s why. The actual value of the property is the sales price, not the asking (appraised) value or its future value. Think of buying a vintage car for one price then fixing it up and selling it for a higher price. Why would you over pay for the future value? The lender looks at the transaction the same way.

Another issue that new real estate investors encounter is, trying to use a bridge loan as a down payment to purchase a commercial property trying to structure a no money down transaction.

In the current market, you will need to have skin in the game (cash). All lenders will require that the investor share in the risk.

Refinance Bridge Loans:

It’s very common for an existing property owner to be approached by their current bank with a discount on their commercial mortgage.

There are many reasons for this. Local market conditions, a drop in occupancy, the repositioning of the bank’s portfolio or the borrower does not meet current personal or business credit requirements.

The initial response from the real estate owner is. I’ll just go down the street and apply for a new loan with another bank. After a number of bank applications, you quickly discover your property does not qualify for traditional financing. Even though you have a very low loan to value and you’ve been making your payments on time.

Here’s why. All FDIC banks have the same underwriting guidelines for commercial loans. When your application is reviewed buy a new bank the same reason(s) your current bank had used to ask you to seek new financing, will be utilized to decline your new request.

Your next option is going to be a short term bridge loan that will enable you to correct the deficiencies or to stabilize the property so it can qualify for more traditional financing, within the next 12 to 36 months.

Myths About Bridge Loans:

There are some common misconceptions that commercial real estate borrowers have when it comes to bridge loans.

The first one is. You don’t need good personal credit or bridge lenders never check credit.

All lenders, both private and agency will review your personal credit as part of their underwriting. If you have a low credit score, in the 500’s, no lender is going to consider you as potential client.

The second most common misconception is. The lender only considers the value of the property; hence I don’t have to have a down payment, or any kind of documentation.

Value and loan to value “LTV” are only part of the equation. You will need a down payment. The lender is going to take a hard look at your previous business experience, business and personal financials as well as exit strategy.

The third most common misconception is. I don’t need to have any liquidity (cash) in my bank account because all my money is in the deal.

One of the first things all lenders review is a client’s personal financial statement. If you are not liquid a lender will be very hard pressed to approve your loan request. They take the position. They’re not a charity and if you’re out of cash you’re out of business.

The Winston Rowe & Associates Advantage:

Winston Rowe & Associates best business practices process includes  managing every step of the financing process from document collection to commitment negotiation and closing.