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lthough bridge-loan underwriting
seems to be more art than science,
with an understanding of what
bridge lenders look for, brokers
can determine the viability of specific transactions and assess which properties and
situations will qualify for bridge financing.
Bridge loans are designed to meet needs of
borrowers who are purchasing or holding properties that are being repositioned, re-tenanted,
improved or otherwise redeveloped and who have
a clear exit strategy for loan repayment. In the
current economic landscape, it is becoming increasingly important for other borrowers, as well.
Often, borrowers requiring interest-only periods
or seeking quicker closings prefer bridge loans.
Borrowers also may use this form of financing
for discounted-note purchases, as well as recapitalization and workouts.
Most recently, borrowers with stabilized assets
also are using bridge loans to take advantage of
opportunities to pay off their existing mortgages
at a discount. Although bridge loans are costlier
than conventional financing, they let borrowers
increase their equity in a property immediately.
Borrowers also can improve their long-term cash
flow by reducing their leverage.
Typical bridge loans have interest rates from
5 percent to 15 percent, origination fees of 2
points to 4 points and loan-to-value ratios (LTVs)
of 60 percent to 75 percent.
They also typically have one- to five-year
terms, which may have interest-only portions.
They often are priced on a risk-adjusted basis,
and pricing will be lower for low-leverage deals
with strong sponsors and high-quality assets in
performing markets.
Brokers who understand the borrowers’
strength — as well as that of the project — and
who present the information to a lender coherently and comprehensively will help ensure their
clients’ funding success.
Know the borrowers
The most critical step in securing a bridge loan
for your clients is ensuring you receive the right
documentation. If you don’t have the information required to understand a transaction fully or
to assess its strength, you risk wasting time on a
transaction that cannot be funded.
Be sure to review the borrower’s strength and
experience. The borrower, or sponsor, should
have completed projects that are similar to this
one in terms of property type, size, scope and location. Lenders typically will not back borrowers
unless they have a track record that can provide
reasonable assurance for their exit strategy.
If problems occur, sponsors also must have the
financial strength to handle them. Get complete
personal financial statements for all principals.
These should include a detailed breakdown of
borrowers’ liquid assets, a detailed schedule of
the real estate they own, and a list of other assets
and liabilities.
The schedule of the real estate that borrowers own should describe each property, including purchase dates and prices, current mortgage
balances, monthly mortgage payments, monthly
income, and expenses.
In addition, review borrowers’ income and
credit profiles to determine if they can support
their current project load. If they show negative
cash flow each year, a drain on their resources
could put the project at risk. Do they have any
contingent liabilities — such as land lots or unsold condominium projects — that could impact
the current project?
Finally, brokers should understand
the structure of borrowing entities and
the project’s key principals.
Know the success factors
Four key factors underpin any project’s viability. This is especially true for bridge
loans. Projects depend on:
1. Sponsor or borrower strength, including background and experience as
well as financial standing;
2. Leverage, which means LTV and
loan-to-cost or cash equity in deal;
3. Asset quality and type; and
4. Market strength.
Borrowers’ capabilities are one
thing; their expectations are something different. Are borrowers
willing to contribute substantial
cash equity into their deal? If not,
move on.
Multifamily and industrial are
the two most-favored property types
for bridge loans; office and mixed-use
follow. Retail and hospitality properties, on the other hand, are increasingly
difficult to finance in today’s economy
because of higher vacancy levels and decreasing asking-lease rates for retail or room
rates for hotels.
Multifamily and industrial projects are executed at more-aggressive leverage than office,
which can be more highly leveraged than retail
and others. Higher-quality assets are more desirable than lesser ones.
When considering market strength, keep in
mind that property location will impact pricing
and leverage. For instance, an office building in
downtown Chicago likely will be financed at better
terms than a similar building in Detroit. Apartment
buildings in Dallas will attract more-advantageous
bridge-financing terms than those in more-overbuilt
markets if all other factors are equal.
In fact, some bridge transactions have great
difficulty being placed with capital sources because of their location, despite bridge loans’ more
flexible nature.
Know the project
Once you understand your borrowers and the keys
to their success, examine the proposed project for
which they are seeking a bridge loan. Many borrowers provide executive summaries that reflect outdated business plans and pro forma numbers that do
not relate to the current situation. Many also request
money at terms they know are unavailable.
To avoid any problems here, know your transaction; do not forward out-of-date documentation to
the lender without review or comment.
Create a narrative summary of your clients’
project timeline, financing expectations and exit
strategy. additionally, your review should include
a detailed property description that includes the
following:
n Square footage of improvements;
n Lot size;
n Number of floors;
n As-of-right usage; and
n A description of construction materials used in
the improvements.
in addition, be sure to include several color pictures of the property in the loan-request package.
This narrative summary should also include a
history of the property and of the project. Describe
it in as much detail as possible and summarize all
past financing on the project.
in addition, compile a budget that details the entire project costs. This will help to summarize for
the lender where the money is coming from to pay
for the project costs.
For investment properties, get a current and
pro forma rent roll in addition to historical and pro
forma income and expense statements. also include
any current purchase agreements, mortgage statements, appraisals, leases, insurance certificates and
tax bills in the loan-request package if they are available, as well as any market studies.
n n n
as with conventional financing, it is important
to seek the best rates and terms from a variety of
bridge-loan sources. Just because these loans typically have more-flexible underwriting criteria does
not mean that a specific transaction will be appropriate for every bridge lender.
in today’s market, bridge loans are an increasingly important method of financing commercial
real estate. Mortgage brokers who invest the time
to understand borrowers’ loan requests and projects
will be able to evaluate projects’ viability with common sense — and will better help clients find funding success.
Adam Luysterborghs is managing
principal of Avant Capital Partners, a
lender and correspondent for several
institutional investors and investment
banks. The company offers permanent-financing solutions for stabilized assets
and bridge loans for properties in transition. Its capital partners rely upon Avant
Capital to take each transaction from preliminary underwriting
through to closing to provide a seamless execution and positive
experience for borrowers. Reach Luysterborghs at (212) 231-9782,
at adam@avcapital.net or via www.avant-capital.com.
