Scotsman Guide - February 2009 Commercial Edition

Bridges Keep Your Clients Afloat

For clients who don’t yet qualify for conventional financing, bridge loans can help

By Lisa Kelly, director of sales and marketing, Equity Secured Capital

The collapse of the credit markets has made bridge loans necessary for many commercial mortgage borrowers. And in particular, it likely has made hard-money bridge loans even more appealing. These loans can take your clients from an undesirable position to a workable one and can facilitate a transaction for a property that has negative or no cash flow.

Because hard-money bridge loans are

speculative in nature and do not require traditional income documentation, banks don’t offer them. Rather, these loans typically come from smaller, private-lending firms, investment pools or individuals. The typical client is bankable, but for various reasons, the deal isn’t.

As a mortgage broker, you may face many situations where your clients need financing to bridge the gap until they qualify for a conventional loan. When offering

these loans to clients, also make sure you are dealing with a direct lender. It will save your clients money and time.

Bridge lending can meet clients’ financing needs using creativity. For example, if a client doesn’t have 30 percent to put down on a purchase, most bridge lenders allow cross-collateralization. That is, clients can pledge another property they own. If the equity is available in property they already own, your clients may be able to put little

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or no money down in the transaction.

Here are some other examples of scenarios where a bridge loan may help:

■ Predevelopment deals: A client needs a loan for a land purchase for development. The bank won’t make land loans because of their speculative nature, however. With a bridge loan, your developer client can get the land zoned and entitled properly. Once the property is ready to be developed, your client likely can get a construction loan from a more-conventional banking source.

■ Speed of closing: A client signs a purchase contract on a building, and the bank agrees to make the loan. The client must close by a particular date or will lose the property. Speed, however, isn’t in the bank’s vocabulary. Most hard-money bridge loans can close within two weeks. Your client can take one out for three months, giving the bank time to complete its due diligence.

■ Increased cash flow: One of your clients has owned a property for several years but is currently property-rich and cash-poor. The client can use a hard-money bridge loan to pay off the mortgage on the property and get additional cash.

Keep in mind that although these lenders primarily look at the property, clients with poor credit are not good candidates for hard-money bridge loans. Hard money doesn’t equate to bad credit.

Although they can help many people, hard-money bridge loans are riskier than traditional loans — and risk is costly. Interest rates typically are 12 percent to 16 percent, and brokers often get 2 points to 5 points. Terms range from three months to three years. Also, loan-to-value ratios for these loans generally don’t exceed 70 percent. For purchases, loan amounts typically are based upon loan-to-cost ratios, not loan-to-value.

Collateral is another key factor for hard-money bridge lenders. They typically evaluate properties’ current values. Unlike traditional lenders, hard-money bridge lenders often value the real estate only and do not account for leases or income.

In addition, don’t expect a lender to accept your already-ordered appraisal, even if it is from a certified appraiser. The lender likely will want to make its valuation from its own trusted appraiser.

Although the current credit crisis has tempered banks’ lending appetite, your clients still have options. There are many opportunities today to make bridge loans work for them.

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Lisa Kelly is director of sales and marketing for Equity Secured Capital, a commercial mortgage lender specializing in making hard-money bridge loans in Texas. There,

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