What the Heck Are Commercial Bridge Loans and Why the Heck Would You Ever Need Them?

As the term implies, commercial bridge loans are temporary financing secured by commercial real estate that bridge gaps for you as the borrower that muscle their way in between you and your next deal. This type of commercial funding allows you to surmount any liquidity constraints and make the most of time-sensitive opportunities in a relatively timely and efficient manner.Commercial bridge loans enable you to access temporary funds that bridge cash flow timing gaps allowing you or your Firm to complete some form of interim task. For example, if you have a balloon payment that’s coming due on an existing loan, you could handle that payment until you obtain permanent financing. Or if there is an extremely limited time-frame during which a particular piece of commercial real estate is available, you could use bridge financing to purchase that asset, then pay off your bridge loan with part of the proceeds from your permanent financing. So, basically, commercial bridge loans are temporary funding that you can use until you sell, refinance, make improvements on, complete, or sell your property.As a way to compensate for their short-term characteristic and their greater risk factor, bridge loans are apt to have greater rates of interest than permanent loans. Typically, commercial bridge loans have terms which range from 6-12 months. Lots of commercial lenders allow you as the borrower to extend your bridge financing for an additional 6 months to 1 year for an additional fee that commonly ranges from a half-point to 2 points on a basis.This sort of financing is ordinarily paid off when the borrower places permanent financing on the subject property, after the actual improvements are finished and new tenants move in. On account of their short-term attribute, commercial bridge loans usually will not have any prepayment penalties.Here’s a typical scenario: Let’s suppose you have a 250-unit run-down apartment complex operating at 60% occupancy in a really nice location under contract for $10 million. Your in depth due diligence has shown that the property will likely be worth $22 million after just $3 million in renovation work that can take 7 months to do, after which you are likely to be able to increase the rents to justify the higher post-renovation valuation. Then, you collateralize your apartment complex to secure a $13 million commercial bridge loan to handle the purchase plus renovations, carry out the work, lease-up the apartment complex to over a 90% occupancy rate, then 7 months later, you refinance it with $22 million permanent financing usually as a conventional commercial mortgage loan based upon the greater after renovation valuation from which you repay your original bridge loan in full.Therefore, commercial bridge loans provide you with short-term funding when you need to have time to fill gaps with regard to your cash flow from operations while you complete such tasks as doing improvements, finding new tenants, selling, purchasing, or refinancing real estate, then simultaneously pay off your commercial bridge lender utilizing a portion of the proceeds from permanent financing that you manage to obtain.