Understanding commercial real estate bridge loans can seem complicated, but it isn’t really. When someone wants to purchase a piece of commercial real estate, and needs time to undertake some task such as property improvement, finding a tenant, or selling the property, commercial real estate bridge loans can make this happen.
Typically, these loans are planned around terms of six months to one year. However, sometimes the lender will allow the owner the option to extend this loan for an additional six months to one year. The fee for this extension is usually between ½ point to 2 points. This type of loan can be thought of as a “financing bridge” that takes place between the acquisition and development of a property and the time before a permanent, traditional take-out loan is enacted.
They can be useful in situations where a borrower wants to purchase a commercial building and is approved for a SBA loan. However, the conventional SBA loan is contingent upon one year of successful business. The borrower gets the money to fund the project by arranging for the seller to carry back thirty percent of the purchase price of a property. The borrower then secures a commercial real estate bridge loan for the remaining portion of the loan. The loan enables the borrower to go ahead and purchase the property and establish a good, solid operating history that qualifies it for conventional, long-term financing.
Permanent commercial loans cost less than commercial bridge loans because commercial real estate bridge loans are only designed for the short haul. They are usually paid off whenever the property owner gets permanent financing. This is after new tenants move in or improvements to the property have been made. These loans generally do not have any type of a prepayment penalty.
Sometimes, banks will extend loans in cases where a borrower has a large reserve of cash and excellent credit. There are many different kinds of commercial loans. One is called an “opportunity fund.” This is a special fund that has been established to provide commercial real estate loans that are high-yield. These types of loans require special understanding and expertise. Real estate financing experts refer to these as “no-brainer deals.” This means they are uncomplicated deals that are so straightforward that even a finance rookie could understand them. Typically, the types of people who invest in opportunity funds are those with endowment trusts, pension plans, private trusts, and some REIT’s.
If a borrower has credit that isn’t great, not much money to pay down on a commercial property, and little or no commercial real estate experience, that person may have to go to a “hard money bridge loan” lender. These kinds of lenders supply commercial real estate bridge loans based on the equity in a specific property.