Commercial Bridge Loans: Fulfilling Short-Term Deficit between Real Estate Transactions
Commercial bridge loans are used by the real estate investors for purchasing commercial properties and carrying out the renovation work before they could qualify for permanent financing solutions by traditional banks. Real estate investors can take bridge finance when they cannot wait for permanent finance from conventional sources. In addition, bridge finances are used for purchasing or refinancing the commercial properties that have unsatisfactory occupancy rates. Taking a bridge loan is beneficial when the credit profiles of the borrowers need significant improvement.
Repayment terms for bridge loans
The repayment terms of commercial finances range from 6 months to 3 years. The property is either sold or refinanced with permanent financial solutions from banks before the repayment terms.
What types of properties can be purchased through bridge loans?
Most of commercial properties can be purchased or refinanced through bridge loans. Many investors take these loans for purchasing raw land that will be developed in the future for commercial purposes. In the US, the short-term bridge loans are used to purchase and renovate multifamily housing buildings. It is also used to purchase offices, shopping malls, hotels, and retail property.
Why investors should consider bridge loans?
As compared to conventional finances by banks, the short-term (bridge) finances have fast closings. In addition, the loans are based on the improved value of the commercial properties rather than its “as it” value. In this way, it provides investors the necessary capital to quickly close on investment opportunities. Through bridge finances, the investors get the capital necessary to complete the renovation work to sell the property.
It is also used to purchase non-owner property unlike SBA 7a loans or CDC / SBA 504 finances. Investors can use short-term finance for purchasing income producing properties.
Who should consider bridge finance?
It is ideal for any real estate investor who is looking to invest in commercial, industrial or residential real estate properties. Such temporary financing solutions are perfect for the investors who are looking to purchase office space for carrying out their business operations. Bridge loans are often used to purchase and renovation work (improvement) of underutilized commercial properties in the US.
How commercial bridge loan works?
Let’s say an investor wants to purchase 40 unit multifamily building that is in extremely poor condition and has only 30% tenant occupancy. He will be able to purchase the property at a significant discount due to its poor condition. A real estate investor only had to pay $2 million to purchase the property in its current state, but the property might be worth $5 million if it is properly renovated and tenant occupancy is increased to 95%.
The renovation work will cost an additional $1 million. The lender will assign the multifamily property a Loan-To-Cost (LTC) value of $3 million. LTC is valued as $ 3 million because the investor will spend $2 million to purchase the property and spend additional $1 million for carrying out the renovation work. The lender will limit his lending to LTC and not to the potential resale value of multifamily property.
With a final cost of $3 million, the lender will provide financing of $2.4 million (80% of the LTC) to the borrowers. This will enable investors to purchase the property for $2 million, and have $400,000 to pay for renovation work. The remainder of the funds needed — in this case, $600,000 — will come from the investors’ own funds.
Once the borrower completes the renovation work, he will have 40 unit multifamily building that is worth $5 million. He will be in a position to sell the multifamily apartment for a profit of $2 million or refinance the short-term loan with permanent financing solutions from a conventional bank.
This update is provided to you by Park West Capital, which specializes in real estate financing and commercial lending opportunities. At Park West Capital, our team of experienced professionals has assisted a number of real estate investors with growing their real estate portfolios. In addition, our bridge loan consultants assisted real estate investors by providing different funding resources. Our team believes in accountability, excellence, integrity, entrepreneurship, and teamwork. Contact us at 800–969–4901 to learn more about how we can professionally assist you with your investing needs or fill out our hard money loan application and we’ll get in touch with you.