Do you want to buy a new office building but are still waiting for your current property to sell to raise the necessary funds? Is your commercial property renovation project running longer than planned, and your balloon loan’s due date is fast approaching?
In scenarios like this, CRE investors and developers turn to bridge loan financing to quickly raise funding. You may need to do the same at some point in your CRE investing journey, so it’s essential to understand how commercial bridge loan works as an alternative financing source in commercial real estate.
Commercial property bridge loans are explained.
If you need cash to buy or renovate a commercial property now but don’t expect to secure a permanent loan for a while, a bridge loan can quite literally “bridge” the gap until you can secure long-term financing (thus, its name).
Known in various markets as interim financing, gap financing, or swing loans, commercial real estate bridge loan help you extract cash from your property to settle existing loans or cover part of the purchase price for a new property.
Here are the critical characteristics of commercial property bridge loans:
- These loans are inherently short-term (ranging from three months to three years).
- Bridge loans fund quickly so that you can act fast on investment opportunities.
- These loans are secured by the commercial real estate collateral.
- Interest rates and fees are relatively high due to the quick approval process and the loan’s short-term nature.
- These loans are issued mainly by private commercial lender and alternative lender like debt funds.
How commercial property bridge loans differ from traditional loans
Because traditional loans can be slow to underwrite and process, you might miss out on opportunities if you rely on them solely.
In contrast, bridge loans close within as little as two weeks, so you can immediately close on a CRE deal and secure permanent financing later.
It’s easier to qualify for a bridge loan than to secure a long-term loan.
While commercial real estate bridge loan lenders will still look at your credit score, it’s not their only basis—they also put a lot of weight on other factors such as your debt-to-income ratio, track record, other assets, the viability of your business plan, and your future refinancing and repayment strategies.
In terms of fees and interest, bridge loans are more expensive than long-term financing because they provide faster funding.
You might also need to shoulder extra costs such as appraisal and escrow fees, title policy, and administrative and loan origination fees. Be sure to plan for them and include them in your evaluations.
Expect CRE bridge loans to have higher interest rates compared to traditional loans. These rates will vary based on your project, the lender’s policies, and the specific loan terms.
Bridge loan lenders are often more flexible regarding how you can use the funds. Unlike traditional lenders who prefer to finance properties after renovations are complete and the buildings are fully leased, bridge lenders will give you more freedom to use the money for various stages of property development.
They will evaluate your plan to acquire, upgrade, or reposition a property thoroughly and will review your track record of success with similar projects.
Finally, because bridge loan providers generally encourage quick repayment, they do not impose prepayment penalties. You will typically have the option to pay off the loan early without additional costs.
How commercial real estate bridge loans work
Private commercial lenders can tailor commercial bridge loans based on your project’s unique needs. As mentioned, these loans carry higher financing fees and interest rates than traditional loans but make up for this with quicker funding and more flexible terms and conditions.
Note that the loan-to-value ratio for a commercial bridge loan usually ranges from 65% to 80% of the property’s appraised value.
If you’re renovating a property, lenders will also calculate the loan-to-cost ratio, which includes capitalized capital expenditures. This ensures that the loan amount can adequately cover your project costs.
Typical scenarios where commercial property bridge loans may be appropriate
- Opportunity acquisitions – You can use a CRE bridge loan to quickly secure a time-sensitive property and refinance it with a more affordable, long-term traditional loan later.
- Expansions and downsizing—If you’re looking to expand or reduce your business premises, you can use a bridge loan to acquire a new property before selling your current one.
- Tenant improvements—Bridge loans are also helpful if you want to invest in property improvements to attract tenants willing to pay higher rents. This will increase your long-term gross rental income and make it easier to qualify for a commercial bank loan.
- Stabilization – CRE investors can also use bridge loans to stabilize a property until it achieves a stable long-term cash flow and is able to meet debt obligations to qualify for traditional financing.
Choosing a commercial bridge loan – What to look for
Focus on these critical aspects when shopping around or comparing CRE bridge loans from different lenders:
Funding time frame: Most lenders specializing in bridge loans can provide funding within a few weeks, though some may take longer. Always clarify the time frame, especially if your deal is time-critical and you need to acquire a property or kick-start a repositioning project immediately.
Flexibility: Can you increase the loan balance during the term? Flexible bridge loans allow you to draw additional proceeds as needed to cover expenses like capital improvements, tenant improvements, or leasing commissions.
Advantages of commercial bridge loans
- Bridge loans immediately provide the funds you need to acquire a property or fulfill an existing financial obligation.
- This quick access to cash is essential for deals when time is of the essence. It allows you to act swiftly on investment opportunities before your competition can seize them.
- Lenders who specialize in bridge loans also often focus less on your credit score and more on the viability of your acquisition or renovation project, so you may qualify for this type of funding solution even if your credit score is less than ideal.
Disadvantages of commercial bridge loans
- Note that the CRE property is used as collateral, meaning the lender can seize it if you default on the loan. Your other assets may also be at risk with bridge financing if you don’t make timely payments. That said, unsecured loans may be available if you are a qualified borrower with an established relationship with the lender.
The initiation and repayment fees associated with bridge loans can also be high, so do the math and ensure the numbers make sense.
Should you take out a commercial property bridge loan?
Commercial bridge loans are versatile financing options in various CRE scenarios. If you’re considering applying for this type of loan, carefully weigh the abovementioned factors. Ensure the loan is aligned with your investment goals and financial situation.
Why choose Private Capital Investors for your bridge loan needs?
Private Capital Investors offers competitive bridge loans that can be customized for different commercial real estate investments. Simply contact our team and tell us about your project, and we will advise you on whether a bridge loan is the best choice, or if another type of CRE loan might serve you better. We will also put together a loan package based on your needs.
We offer bridge loans up to $50 million with terms ranging from 1 to 3 years. Designed to fit different CRE strategies, these loans are attractively priced—interest rates start as low as 8.5% and the maximum LTV ratio is 85%.
What sets Private Capital Investors apart is that we handle your monthly tax and insurance escrows along with setting aside replacement reserves.
Whether you need to act fast on a deal, fund a property that isn’t fully leased yet, or require money for a complex project with foreign investors or a unique property, we can tailor a solution for you.
We specialize in financing a variety of CRE situations including the following:
- Foreclosure purchases
- Traditional acquisitions
- Renovation projects (rehab)
- New constructions
- Lease-up properties in strong markets
Our financing options are not limited to one type of property, either. Here at Private Capital Investors, we provide bridge loans for multi-family units, office spaces, retail locations, luxury residential properties, urban land, self-storage facilities, light industrial sites, hospitality venues, development projects, and mixed-use properties.
Private Capital Investors has the flexibility and expertise to support your financing needs effectively whatever your commercial real estate venture.
When you choose Private Capital Investors, you’re choosing commercial real estate experts who fully grasp the nuances of CRE deals that often fly over the heads of traditional lenders like banks.
We are a trusted direct lender with a team of experienced Commercial Real Estate loan professionals ready to analyze your financing needs and recommend a solution that benefits your project.
We offer bridge financing across various locations, including Miami, Denver, Massachusetts, Phoenix, and Texas, with benefits like low rates, nationwide lending, quick approvals, and funding in as little as 14 days.
And with our common-sense underwriting approach, you can expect a smooth and transparent loan process.
