n times and markets where bridge lenders openly offer
credit, traditional banks are active and other lenders
— like correspondent insurance companies — are
searching for yield, commercial mortgage brokers
can carve out a niche for themselves in which they
become well-known experts. If they are successful in that effort,
they’ll receive a plethora of referrals.
Even when brokers decide to acquire such knowledge, however,
they still need to find a path that ensures they are supplying some
sort of unique value. Becoming an expert in arranging short-term,
fast-closing bridge loans is a perfect way for a mortgage broker to
stand out from the rest of the crowd.
There is always high demand for fast closings or highly specialized loans. In hot real estate markets where buyers risk losing a
project if delays occur, the need to close an acquisition using a
short-term bridge loan increases, which makes the broker’s work
in facilitating such deals that much more important and valuable.
Know the purpose
Commercial bridge loans are generally used when permanent
financing is not an option. Various factors can cause this, including
low occupancy rates, poor property conditions or a lengthy closing
period. Bridge loans generally last one to three years and are
interest-only for the life of the loan, with a balloon payment at the
end. Current interest rates for bridge loans average about 8 percent
to 12 percent and these loans can close in as little as 10 days.
Many bridge lenders have a narrow focus and offer a handful
of products. Specializing allows them to close quickly. Despite the
benefits of concentration, it also means that a commercial mortgage broker needs to work with a large number of bridge lenders
to satisfy a broad array of needs. Thus, spending time each day
searching out and developing relationships with numerous bridge
lenders is beneficial to both clients and brokers.
Interestingly, bridge lending often provides an opportunity
for follow-up loans immediately after closing. Bridge loans have
terms that are generally shorter than conventional commercial
mortgages. Therefore, they need to have an exit plan or takeout
strategy in place before the loan closes. Many times, a mortgage
broker is already working on an exit plan
ahead of the closing on the bridge loan
and can project additional revenues.
If a land loan was used to complete the acquisition of a vacant
parcel to build a mixed-use development, for example, there
would then be a need for a niche loan, specifically a construction
bridge or improvement loan. Once the project is completed —
and if the developer plans to hold the asset long-term — there’s a
follow-up opportunity for a stabilized permanent loan.
Niches to consider
Many types of projects are a good fit with bridge-to-permanent
financing scenarios. Here are three broad categories of commercial
real estate in which bridge loans can be successful.
■ ■ Value-add. Loans on value-add properties are generally for
rehab, improvement and repositioning purposes, and are a
great area to focus on. Take, for example, the acquisition of a
warehouse with some small improvement funds set aside. A
full teardown may not be required, but interior or structural
improvements, or even a rehab budget, could be needed. The
property could then be repositioned and leased so it is financially
stable. Once the asset stabilizes, cash flow for a takeout loan
can be established.
Another example of a value-add project is an underperforming
50-unit apartment building with retail businesses on the first floor.
The property has vacancy issues in both the multifamily and retail
spaces, making the income and debt-service ratio undesirable
for traditional lenders. An investor is purchasing the property for
$5 million with a plan to increase occupancy and improve both
the apartment units and retail space. The improvement budget is
$1 million, for a total project cost of $6 million. A bridge loan with a
65 percent loan-to-value (LTV) ratio would be issued for 12 to 24
months. Once the project is completed, it may have an after-repair
value of $8 million. At this stage, there would be an opportunity
to refinance into a stabilized permanent mortgage.
■ ■ Land. Land loans are usually harder to complete because of the
high-equity and low-leverage requirements. They are generally
used to assemble property that will contribute to a development
project. Despite their difficulties, they’re an integral part of development finance. In arranging land loans, commercial mortgage
brokers also set themselves up to negotiate the construction
and takeout financing going forward.
An example of a land transaction might entail assembling acreage
for a condominium project. That effort might involve, for example,
purchasing three separate parcels for a total of $5 million, with construction groundbreaking planned after the land acquisition.
Financing could generally come from an 18- to 24-month bridge
loan, with a loan-to-value ratio of 50 percent to 60 percent and
an interest rate of between 10 percent and 14 percent. Again,
closing a land loan provides a broker a future opportunity
to compete for a construction loan.
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