What are Commercial Bridge Loans and How Do They Work?

Commercial bridge loans are a flexible loan arrangement intended to provide short term financing until an exit strategy, like a refinance or sale, can be executed. Commercial bridge loans act as interim funding, facilitating the purchase of commercial real estate and completion of rehabs or upgrades, but not acting as permanent financing. A commercial bridge loan provides financing to purchase a commercial property that’s in need of significant renovations or upgrades. They can also be used by borrowers not yet able to qualify for permanent financing.

If you’re looking for a bridge loan for a residential property, like a rental home or fix and flip project, you should read our article on the best hard money lender.

What Are Commercial Bridge Loans?

Commercial bridge loans (also known as commercial mortgage bridge loans) are short-term commercial real estate loans that are used for the purchase of commercial properties when permanent financing is not an option. Their primary use is when a property needs significant renovation before it will qualify for permanent financing. However, there are other reasons a borrower might want to consider a bridge loan:

• The property has unsatisfactory occupancy rates
• The borrower’s credit profile needs improvement
• The borrower can’t wait for permanent financing
• Incomplete ownership / project team in place

Bridge loans typically have repayment terms of between 6 months and 3 years, after which the property is either sold or refinanced with permanent financing.

Commercial bridge loans can be used for the purchase or refinance of office buildings, hotels, retail property, multifamily housing including apartment complexes, and even for raw land that will be developed for commercial purposes.

They feature quick closings and the loan amounts are based on the fully improved value of the property, rather than its “as-is” value. In this way, commercial mortgage bridge loans provide the capital that a real estate investor needs in order to close on opportunities quickly, complete necessary renovations (if needed), and either sell or refinance into permanent financing with affordable monthly payments.

Unlike SBA 7a loans or CDC / SBA 504 loans, which require the majority of the property be used for your business to operate out of, commercial mortgage bridge loans can be used for non-owner occupied property. That means bridge loans can be used on commercial investment properties and income producing properties.

Who Are Commercial Mortgage Bridge Loans Right For?

Commercial bridge loans can be a valuable tool for those looking for investment real estate (commercial, residential, or industrial) or for businesses looking for space to operate out of.

The most common purpose of a commercial mortgage bridge loan is for the purchase and improvement of an underutilized commercial property. They enable you to both purchase a property that’s in poor condition and perform needed renovations and upgrades.

Example: Using Commercial Bridge Loans to Buy & Renovate Investment Property

Let’s say you’re purchasing a 20 unit apartment building that’s in poor condition and has only 50% tenant occupancy. Because of it’s poor state, you are able to purchase the property at a significant discount. While the property might be worth $2.5 million if it were completely renovated and tenant occupancy was increased to 90% or more, you may be able to buy it for $1 million in its current state.

Renovating the apartment building to a place where it’s appraised at $2.5 million will cost an additional $1 million. The commercial bridge loan provider will the assign the property a loan-to-cost value of $2 million ($1 MM purchase + $1 MM renovation = fully renovated). A commercial bridge loan provider will typically limit their lending to this loan-to-cost and not the potential resale value.

Most commercial mortgage bridge loans will be available for up to 80% of loan-to-cost (LTC). With a final cost of $2 million, the lender will provide financing for $1.6 million. This will enable you to purchase the property for $1 million, and have $600,000 to pay for renovations. The remainder of the funds needed – in this case, $400,000 – will come from your own funds.

Once the renovations have been completed, you have a property worth $2.5 million, and will be in a position to refinance the bridge loan with permanent financing or sell the property for a profit.

Other Ways to Use Commercial Mortgage Bridge Loans

While purchasing and renovating commercial properties is the most common use for commercial mortgage bridge loans, there are other situations where they can be helpful.

For example, since commercial mortgage bridge loans are primarily asset-based, you may be able to use one to purchase a property at a time when your credit profile is less than ideal. In an industry that can result in large swings in important underwriting ratios like debt-to-income (DTI) and debt service coverage (DSCR) and even result in mechanics lien, a less than ideal credit profile means more than just “bad credit.” A commercial bridge loan can allow you to obtain temporary financing that lasts long enough for you to resolve other credit issues in order to obtain permanent financing at a later date.

Commercial bridge loans can also be a good fit for borrowers when they have an opportunity with a limited time window and need to secure financing quickly. Similarly, if while permanent financing typically require you to have a complete project / management team in place, a commercial bridge loan can be obtained to secure an opportunity while you finish working out final details.

Commercial mortgage bridge loans can also be used to purchase and develop raw land, to demolish existing structures and rebuild, or for purchasing, renovating and selling existing properties, (aka fix-and-flip loans). Unlike blanket mortgages, commercial bridge loans apply to a single property and have a due-on-sale clause.

How Do Commercial Mortgage Bridge Loans Work?

Commercial bridge loans work by lenders making riskier loans for short periods of time. While providers or permanent commercial real estate financing will lend based on current LTV (loan to value), commercial bridge loan providers will lend based on LTC or ARV (after-repair-value). Their financing allows you to bet on the property’s future value, not its current value.

A commercial bridge loan works best when you’re acquiring your target real estate at a large discount, typically due to poor condition or poor management. Once you have your target and reasonable estimates of the necessary renovations to bring the property up to standard, you’re ready to apply for bridge financing.

The lender will evaluate not only the property and your renovation plans, but also the property’s market (real estate market, job market, etc.) before deciding to approve or reject the project. If approved, the lender will determine pricing for the loan based on the risk involved. Unlike permanent commercial real estate financing, bridge loans are highly customized products, so the rates and terms can vary significantly.

Commercial Bridge Loans: Terms, Rates, & Fees

Commercial mortgage bridge loan providers generally require a minimum deal size of $1 million, but there is virtually no maximum. The actual amount of the loan is determined primarily by a combination of the value of the property, the cash flow it generates, and the net worth of the borrowers.

The loan amount will be determined by a combination of loan-to-cost ratio (LTC) and loan-to-value ratio (LTV). The LTC is calculated based on the acquisition cost of the property, plus the expected cost of renovating it. The lender will generally make a loan equal to between 65% and 80% of the LTC.

The lender will also consider the finished value of the project. The value will be determined by market value upon completion, as well as the cash value generated on the completed property. They will make loans of up to 80% of the LTV based on that finished value.

Interest rates are generally based on the six-month LIBOR index, plus a spread of 4.5 – 5.5 points, though this calculation can vary by lender and by the property being financed. Commercial bridge loans are normally interest-only loans, not fully amortizing. Prepayment penalties, where applicable, are generally limited to a relatively small amount of interest.

Qualifying for a Commercial Mortgage Bridge Loan

Qualifications for a commercial bridge loan will vary from lender to lender. That said, the table below summarizes typical qualification requirements for commercial mortgage bridge loans:

Debt Service Coverage Ratio

One of the most important qualifiers is your ability to handle the debt obligation. This is typically calculated by using the debt service coverage ratio (DSCR). That ratio measures the annual net operating income (NOI) of the property, which is the total gross income from rents, less property taxes, insurance, utilities, repairs and maintenance, and sometimes a vacancy factor. The net annual operating income must be sufficient to cover at least the annual carrying costs for the financing. 100% coverage is expressed as 1.00, and lenders will typically require a ratio of 1.1 – 1.25.

Experience

You (and other owners) also have to supply a resume to demonstrate your prior experience working on the type of project that you’re currently undertaking. Your level of experience will have an impact on the size of the loan you’ll receive, the cost of originations, and the amount you be asked to hold in reserve. You can generally assume that if you have no prior experience in the project you need the loan for, that the loan will not be approved.

Net Worth

Commercial bridge loans, in general, will not exceed the total net worth of the individuals applying for the loan. When applying for a bridge financing, you will have to provide financial statements on all principals. The lender will use these to evaluate the financial strength of the individual or group applying. They will also use it to determine the collective net worth of the applicants. You can use our free net worth worksheet to calculate and document your net worth.

Cash Reserve

Bridge loan providers may also require that you show sufficient cash reserves to cover certain contingencies, such as replacement reserves on apartment buildings. More commonly, they will hold back a certain amount of the loan proceeds as an interest rate reserve. That will provide the lender with a fund from which to draw monthly interest payments, while the property is in renovation status, and not generating a full cash flow.

Credit Score

While credit score play a very significant role in qualifying for many other types of financing, they are not as important for commercial bridge loans. Most bridge loan providers will check your credit, and will expect a credit score above 650, however this is primarily to verify that refinancing the loan with permanent financing is a viable exit strategy. DSCR and other measurements, like net worth, will be more important qualifications than credit scores.

Documentation

Personal (all borrowers and principals)

• Credit report
• Tax returns
• Resume

Property & Project

• Income and expense statements from the previous property owner
• Rent rolls (download a free template here)
• Schedule of leases
• Executive summary (or action plan)
• Breakdown of renovation costs and project schedule
• Exit strategy (sale, refi, etc.)

Once your documentation has been submitted, the lender will order an appraisal of the subject property, including an environmental study. They also commonly request a “broker’s letter of value” on the property, provided by a commercial real estate broker who has significant experience in the local commercial real estate market. They will also order a survey of the subject property, as well as a title search and title insurance.

Where Can I Find a Commercial Mortgage Bridge Loan

You can find commercial mortgage bridge loans at local or regional banks, or through certain commercial mortgage brokers. To help you in your search, we’ve provided information on three such lenders. This table below serves as an overview with more details below.

Commercial Bridge Loans with Bloomfield Capital

Bloomfield Capital is a direct lender that lends in all states except California and Nevada.

They specialize in various types of real estate loans on multifamily, office, hospitality and other types of commercial properties. The commercial mortgage bridge loans they provide represent first mortgage liens on the subject property. They provide quick turnaround times, and loan amounts of between $1 million and $15 million.

While the commercial mortgage bridge loans they provide are generally between 12 months and 24 months, they will extend them up to three years. They will make loans of up to 80% of the final value of the property, and at interest rates starting at 9.0%. Origination fees are typically between 2% and 6% of the loan amount.

They look to make loans that have urgent closing times, with turnaround times between 3 – 4 weeks. Their minimum loan size is $5 million, and they look for loans with a strong value proposition in a clear exit strategy.

They make loans to all business types, including sole proprietors, partnerships, LLC’s, and corporations. Loans can be either recourse or nonrecourse, and generally involve a six-month “lock out”, in which you are prohibited from paying off the loan early. This lender does not require reserves, however a strong cash position does enhance the likelihood of approval.

Visit Bloomfield Capital

Commercial Bridge Loans with Arbor

Arbor is also a nationwide lender. They will lend in any market, and on any project, as long as it makes financial sense. Their minimum loan amount is $5 million, but there is no maximum loan amount. Loans are interest-only, typically non-recourse, and range in term from one year to three years. They usually don’t include prepayment penalties.

Eligible properties include multifamily, office, retail, industrial, hospitality, and student housing projects. All must be located in strong markets with positive demographics, population and employment trends.

Interest rates range from 6.5% to 9.25%, and they have an innovative structure on their origination fee. The fee is 2% of the loan amount, with 1% paid at closing, and 1% paid upon the payoff of the commercial mortgage bridge loan. However, the back-end fee will be waived if you obtain permanent financing with Arbor.

Since the loans done by Arbor are typically non-recourse, no personal guarantee is required, and therefore no income tax returns. You do have to provide personal financial statements for each of the principals involved in the project, as well as documentation of previous experience on similar projects. They prefer a credit score of at least 680 – not for the bridge loan itself, but so that your credit will be acceptable to obtain permanent financing.

As is the case with most commercial mortgage bridge loan lenders, Arbor lends primarily based on the financials of the property itself. They require a minimum DSCR of 1.10% “as is”, but also 1.25% upon completion. They also require historical financial statements on the subject property, an action plan, a breakdown of renovations, and a rent roll.

Visit Arbor

Commercial Bridge Loans with C-Loans.com

C-Loans is is a commercial mortgage broker that lends on a nationwide basis. They work with as many as 750 lenders, and will provide you with the most appropriate lenders from the field. One advantage that they do have as brokers is that they have access to hard money loans. If you’re unable to obtain a commercial mortgage bridge loan from traditional sources, they can help you to get a nonprime loan.

Loans are available for between $1 million and $40 million, with terms up to two years. Interest rates can range from 6.0% to 9.25%, with an origination fee of between 2% and 3%. They can turn loans around in as little as 2.5 weeks, and loans are generally recourse.

Prepayment penalties generally apply only in the first three months that a bridge loan is outstanding. If you pay off the loan within that time, you will be required to pay the balance of three months interest on the loan. They will also escrow interest reserves, so that the debt can be serviced while the property is being renovated, and cash flow is minimal.

As is usually the case with commercial mortgage bridge loans, the loan is based primarily on the subject property. Properties should have a minimum DSCR of 1.25% based on cash flow at completion. They typically require rent rolls, a schedule of leases, and an operating income and expense statement covering the most recent 12 months.

For individual borrowers, they generally require personal financial statements and two years tax returns, as well as a minimum credit score of 680. This again is to ensure your ability to obtain permanent financing at the end of the bridge loan term.

Visit C-Loans.com

Bottom Line

If you’re looking to purchase a property that will need substantial renovation, and need capital for both the purchase and the property improvements, a commercial mortgage bridge loan might be the right type of financing for you. A commercial bridge loan can work for many types of properties, including multifamily residential, retail, office, and industrial property.

You can use the funds to facilitate the purchase and completion or renovations or construction and then either sell the property at a profit, or use the enhanced equity in order to get permanent financing with lower rates and longer repayment terms.

Commercial mortgage bridge loans are the perfect vehicle to convert an underutilized property into a completely renovated project, generating a positive cash flow.

Visit C-Loans.com