Bridge lenders for commercial real estate
Commercial bridge loans are short-term loans used for commercial real estate projects, including acquisition or renovation. Also called “bridge loans”, they are designed to provide temporary financing, usually for up to 24 or 36 months, until long-term financing can be obtained.
Bridge loan options for commercial property
A commercial real estate bridging loan allows a business to obtain financing quickly, often to acquire or renovate commercial real estate. It can also be used for specific needs such as buying out a partner or stabilizing the lease (pre-letting financing until the property is leased at a certain percentage).
The way bridging loans work, they are meant to be used for a short time until a traditional loan can be obtained. The new loan will then be used to refinance the bridge loan, and additional funds may also be available depending on the details of the agreement.
Since the funds will be loaned for a few months or years, these loans generally have a higher cost than traditional commercial real estate loans. This is a short-term financing solution that is intended to be replaced with long-term financing as soon as possible.
Where to find a bridging lender
Commercial bridge loans are a specialized type of commercial real estate loan. The main types of lenders offering this type of financing include:
Banks: Some banks and even credit unions can provide commercial bridge loans. However, banks often have some of the strictest qualification requirements.
Commercial real estate lenders: Lenders who specialize in business loans for real estate may offer this product in addition to other types of business financing. This may include online lenders.
hard money lenders: These lenders specialize in transactions that are harder to finance, usually at a higher cost. These are often private lenders seeking to quickly make the funds they lend profitable.
Your real estate professional may be able to suggest local lenders offering these types of loans, but you may also want to shop around to ensure you get the best deal.
What to look for in a bridging lender
These questions can help you identify the right lender for your situation:
Does the lender serve your industry? Some lenders may specialize in commercial properties, while others may have more experience in healthcare facilities. Make sure the lender works with companies in your industry or the industry in which you are buying the property. (The industry is often identified using NAICS codes.)
What are the down payment requirements? If a lender only lends up to a maximum LTV (loan-to-value) of 65% but you only have a 30% down payment, there will be a gap that you need to fill.
What is the typical turnaround time? An important consideration will often be whether you can get financing quickly. These loans are often used for urgent projects. Therefore, you want a responsible and reliable lender who can get your business the financing it needs to meet your deadline.
What refund options are available? Often a business does not have sufficient cash to immediately make fully amortized monthly payments. Interest-only payments can help preserve funds in the meantime.
What is the cost? The interest rate will likely vary depending on the type of property purchased, the down payment and the qualifications of the borrower. However, the lender should be able to provide a range of bridging loan rates before you complete a full application. You will also want to understand the typical fees (originating fees, closing fees) that will be charged as well as any prepayment penalties.
The best bridging lenders
The best lender is the one who will help your business get the financing you need at an affordable cost. Here are three to consider:
Awana Capital promises fast approval and closing times at competitive rates for qualified borrowers.
Arbor announces interim financing for properties located in strong markets with excellent sponsorship. Structured Finance® Bridge is up to $15 million.
Bloomfield Capital focuses on commercial bridge loan amounts between $2 million and $20 million.
What is the average interest rate for a bridging loan?
Expect higher interest rates than with a traditional business loan, such as a bank loan. Variable rates are common. Interest rates tend to rise in 2022 and could change quickly. However, you can usually expect rates to be between 7-15% or more.
What credit rating is needed for a bridge loan?
Credit score requirements for residential bridging loans will be much more common than in commercial real estate. With these types of loans, the strength of the deal will be paramount. However, the lender may require the borrower to have a good credit rating, as this may affect the ability to obtain permanent financing. A credit score in the high 600s or low 700s may be required.
Factors that will be important in this type of agreement include:
You may see the term “sponsorship,” which refers to borrower qualifications such as commercial real estate experience, net worth, and liquidity.
Is it difficult to obtain a bridging loan?
Getting a bridging loan for commercial real estate isn’t necessarily more difficult than other types of home loans, but it won’t be as easy as getting unsecured loans for small businesses. Entrepreneurs with no commercial real estate experience will want to work with a lender who can guide them through the myriad of requirements.
Borrowers new to general commercial real estate may also want free help from SBA resource partners such as the Small Business Development Center or SCORE, both of which can provide free mentorship. SCORE volunteers who have experience working in commercial lending or commercial real estate can be especially helpful. Find your local SBA resource partner here.
What are residential bridging loans?
Residential bridge loans are used by homeowners for short-term financing. There are two common scenarios where they are used:
- New construction. Homebuyers building a new home can get a bridge loan to cover costs until the new home is built and a traditional mortgage can be secured.
- Selling and buying a house. Homeowners who are moving and planning to sell their current home may need new home financing before their old home is sold. A bridging loan can help them do this. This is especially important in the recent sellers’ market where buyers may not accept an offer conditional on the sale of another home.
Borrowers will need to qualify for the bridge loan and, if applicable, the new mortgage loan. Credit scores, debt-to-income ratio, and sufficient income to make mortgage and other debt payments will be crucial qualifying factors.
A home equity loan, home equity line of credit (HELOC) are two types of second mortgages that can act as a bridge loan if you have a property with sufficient equity.
Alternatives to commercial bridging loans
There are a number of short-term small business loans that may be easier to obtain or more suitable for specific purposes.
The SBA 504 loan is an option to explore, either to acquire a new property or to renovate an existing property. It won’t be as quick as some bridge loan options, but the rates and terms can be great. Due to SBA lending requirements, it must be at least 51% owner occupied.
If you are looking for a short term loan not secured by real estate, you may want to consider a commercial term loan. Banks as well as online lenders offer short-term loans, usually with repayment terms of 12 to 36 months. Typical qualifications for these loans include good credit, at least two years in business, and income supported by business bank statements.
A business line of credit can also be a good way to access financing quickly. With a line of credit, you will only pay interest on the amount you borrow. It can be useful in addition to a bridge loan and can be used for various working capital needs.
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