Many a time, investors face situations where they need urgent funds in order to renovate or purchase a commercial real estate, which will later fetch them benefits.
In such situations, commercial mortgage bridge loans are one of the best options, where the investor is sure about the future returns after investing money now.
Commercial mortgage bridge loans are the loans that are intended to provide immediate short-term financing until there is an exit strategy for the borrower.
The classic example of a circumstance that calls for a commercial mortgage bridge loan is when you’ve purchased an apartment with the intention of renting it out.
As an owner of the building, you’re aware that if you spend some money on renovating the building according to the modern needs, you’ll get better clients who are willing to pay high rent.
In such a condition, you can use a commerce mortgage bridge loan to arrange the funds for your renovation requirements and pay back the loan after you find new high paying tenants.
Put it simply, commercial mortgage bridge loans help in financing the short-term financial needs to make renovations to the commercial real estate property and thus give you more returns.
These are the loans that are used for the purchase of a commercial real estate property when the investor is not in a position to avail the permanent financing.
Here is a list of circumstances where availing the commercial mortgage bridge loans is the best option:
Number 1 – When the commercial real estate property has unsatisfactory occupancy rates
The commercial real estate properties are built with the purpose of having a constant source of income.
But many times the earnings from your commercial real estate property might not be satisfactory due to number of reasons like old-fashioned architecture, repair works and other discomforts leading to low rental rates.
At such situations, making some renovations and repairs to the existing property and adding some upgrades like building some clubs, swimming pools and parks for tenants, making more space for car parking etc can help you in earning much higher rent or lease rates.
With this increased revenue, you can repay the raised loan. This is where commercial mortgage bridge loans are the best option to consider for availing your loan.
Number 2 – To complete a sale transaction
There can be some expenses in relation to the completion of a sale transaction like making your existing commercial real estate property more ‘Sale-able’ by painting the building or making some extensions to the same building which might bring you more exciting deals.
In such cases, you can avail a commercial mortgage bridge loan that’ll help in leveraging funds required for making such extensions and thus bring you more money which can be used to repay this loan.
Number 3 – Adding more upgrades to your office space
When your competitor is able to attract more customers simply because his office or apartment space looks more interesting and appealing than yours’, you may have to consider making needed renovations or adding more upgrades to your respective space to bring more business.
At such times, availing a commercial mortgage bridge loan is the best option for you.
Number 4 – Arranging funds to recruit more efficient employees
Employees are the backbone of any organization and if your team is not performing well, it is a sure sign that your business will be doomed in near future.
So, in such cases, you’d want to hire new and more qualified employees which will definitely require funds. In such cases again, availing commercial mortgage bridge loans can help a lot.
When you face the above fore said circumstances or other similar issues where you need short-term financing in order to complete a transaction that’ll fetch you returns in long run.
Before you take the final call, you must also know the basic eligibility criteria for availing such loans. The conditions amounting to eligibility differs from one bank to another or one private money lender to another, but the following criteria are the most common ones:
Eligibility criteria for availing a commercial Mortgage bridge loans
1) Debt Service Coverage Ratio
One of the key qualifiers for availing a commercial mortgage bridge loan is your ability to handle the debt taken.
This is usually analyzed by calculating the debt service coverage ratio.
It is measured by taking into consideration the net operating income which is the total gross earnings by rents or leases less the interests, property taxes, insurance and a percentage of vacancies.
The annual net operating income typically must at least be able to cover the annual carrying costs of the loan for the month-on-month interests that need to be paid.
A 100% coverage here is considered as one and most banks or private lenders will require the ratio to be in between 1.1 to 1.25.
2) Net worth
The total net worth of the applicant must be more than the value of the commercial Mortgage bridge loan.
In no case shall any bank or private lender lend funds that’s higher than the total net worth of the individual or group applying for the loan.
In case of a group of individuals who’re applying for a single loan, the total net worth is the sum total of a net worth of each of the individuals.
3) Credit score
A credit score is one of the most important eligibility criteria for many types of other loans but it’s not as important for availing a commercial mortgage bridge loans.
A decent score of 650 is sufficient to avail a loan as other qualifying factors like Debt Service Coverage Ratio and net worth are more important qualifiers for availing bridge loans.
However, a minimum of 650 credit score is required so that the banks or your private lenders can rest assured that permanent financing is a viable option.
4) Experience counts
The banks or your private capital lenders would be interested to know if you’ve any prior experience in working on the projects that are similar to your current project for which you’re willing to avail a loan.
This is basically done to check if you have the capability of managing the project and performing well in it so that you can pay the interests and other costs of availing commercial bridge loans and not default in such payments.
One may say that if a party has zero experience in handling the projects that are similar to the project for which loan is applied, in most cases, the loan shall not be sanctioned.
Features of commercial mortgage bridge loans
1) Term of the loan
The term of the commercial mortgage bridge loans is generally between 6 months to 3 years.
It may vary from one lender to another and from one private lender to another but the general term of a typical bridge loan ranges between 6 months and 3 years.
2) Loan-To-Value rates of the loan
Most banks and private lenders have Loan-To-Value rates that are up to 80% and not anything higher than that bracket.
3) Interest rates
The interest rates for commercial bridge loans are generally ranging between 6% to 9.25% varying from one bank/private lender to another.
4) Pre-payment penalties
There is no common trend in the pre-payment penalties and most commercial bridge loans’ providers have stringent terms requiring pre-payment penalties and some banks do not give an option of pre paying the loan at all in the first place.
So while you’re discussing the terms of your loan with your bank or lender, make sure you definitely enquire about the pre payment penalties.
5) Amount of the loan
The amount of the loan has to be a bare minimum of 1 million US Dollars but there is no maximum bracket for this.
Depending on your individual debt service coverage ratio and net worth, you can avail any amount of money depending on your bank or private lender.
Bottom line
Commercial mortgage bridge loans are the perfect vehicle for you to convert an underutilized property into an upgraded or renovated a commercial property that would accelerate positive cash inflows to you.
Especially if you have good debt service coverage ability and net worth, these loans are the best to avail.
Also, don’t forget to enquire the terms and conditions of such loans in different banks to know the best deals for you.
Because many a time, loan borrowers are so excited to get their loan and just complete their deal that they almost forget to enquire in detail which might pose problems in future.
There’s no point in regretting later right? So don’t forget to conduct your research before you available your loan from a bank or a private lender.
Be well informed about all the terms and conditions of the loan along with knowing the various exit strategies you have.
