Factors Used in Underwriting Bridge Loans

Underwriting a bridge loan involves an evaluation of the property, the market, the borrower’s history, and the lender’s takeout to determine the level of risk involved for the lender and whether it’s a wise financial decision to issue a loan. Learn more about the underwriting process and the many metrics underwriters weigh to make their decisions.

VCREF’s Underwriting Process for Bridge Loans

At Verus Commercial Real Estate Finance (VCREF), the underwriting process begins as soon as we receive an inquiry submission by email with the necessary information and financial statements. Our underwriters conduct a high-level overview in order to provide a soft quote. This process typically takes 1-2 days. We can then provide a term sheet if the sponsor agrees to the terms.

This initial review will let the underwriting team know whether a transaction looks promising or whether VCREF should pass on the transaction. Reasons for denial can vary. For example, the lender may not agree with the sponsor’s assessment of value, the market may not be liquid enough, or the sponsor may lack the necessary qualifications.

If underwriters don’t encounter any initial reasons for disqualification, they then undertake a more detailed underwriting process before officially approving the loan.

The underwriter will carefully assess various aspects of the property, the market, and the sponsor using a variety of standards. They will also look ahead to consider the exit plan of how VCREF would get taken out of the loan, whether that be through a refinance or a sale.

The underwriting process can take different amounts of time for different lenders. An advantage of bridge loans is that they tend to involve a faster closing process than more traditional long-term loan products. VCREF can typically close on a bridge loan in just 30 days. 

Bridge Loan Underwriting Metrics

Underwriting teams carefully consider four areas when underwriting a bridge loan: the sponsor, the property, the market, and the sponsor’s exit strategy. Below, we explore each of these areas and the specific underwriting metrics considered.

The Sponsor

• Credit history: Underwriters evaluate the sponsor’s current credit score and credit history, looking for possible issues such as bankruptcies, late payments, and more.
  
  
• PFS: The personal financial statement (PFS) is essentially a balance sheet that includes a sponsor’s assets and liabilities. VCREF is interested in seeing the sponsor’s net worth and liquidity to determine if they are eligible for a loan.
  
  
• SREO: For commercial real estate loans, another important piece of information is the sponsor’s schedule of real estate owned (SREO). This document outlines all the properties in the sponsor’s portfolio along with the debt associated with each property. The SREO also shows whether a sponsor has experience with the relevant property or project type.  

The Property

• LTV: A key underwriting metric is the ratio of the loan amount to the value of the property, known as the loan-to-value (LTV). VCREF uses the as-is value for day 1 funding and considers the as-stabilized value for the final assessment. 

• LTC: Underwriters also look at the loan-to-cost (LTC), the ratio of the loan amount to the project cost. As with LTV, a lower LTC means a lower risk to the lender. VCREF will generally approve loans up to 80% LTV and LTC for multifamily and industrial properties and up to 70% for retail and office. 

• DSCR: To determine if a property is profitable, the underwriter will look at the property’s debt service coverage ratio (DSCR), which compares the current and projected income for the property to the cost of its debt obligations. 

• Debt yield: Underwriters must also consider how long it would take the lender to recoup their investment if the borrower were to default on the loan. They do this by looking at the debt yield—the property's net operating income divided by the total loan amount.

• Cash flow: Cash flow is another important factor. VCREF bridge loan underwriters run a discounted cash flow model to estimate the value of the investment based on the revenue it is expected to generate in the future. 
  
  
• Rollover: In the case of office and retail properties, another important consideration is possible rollover in tenants. It’s important to understand when the lease expiration dates are and how likely it is that the tenants will renew their leases.

• NOI: Underwriters gain insight into a property’s revenue potential by looking at its net operating income (NOI). NOI is the revenue a property generates after all operating expenses are extracted.

The Market

• Vacancy: When it comes to the market, an important trend to look at is vacancy rates. An underwriter wants to know how likely it is that your property will attract renters so it can maintain cash flow through the loan term.

• Absorption: Underwriters also get an idea of tenant demand by looking at the absorption rate. This rate notes the square footage in a certain market leased by tenants over a certain time period.

• Cap rate: The capitalization rate (cap rate) can help underwriters project a property’s future rate of return. They calculate this metric by dividing a property’s net operating income by its property asset value. 

• Rent trends: Underwriters also look at rent trends in the market to get an idea of how much revenue a property might be able to generate over time. The underwriter may also compare rental rates for the property to market norms.

Exit Strategy

For the exit strategy, the VCREF underwriting team will look at the market and how traditional loans are currently being structured along with the current rates being offered. They will also look at how those rates are expected to evolve over the length of the loan term and consider what position the borrower and the next lender would be in after the bridge loan matures.

Apply for a CRE Bridge Loan from Verus Commercial Real Estate Finance

At VCREF, we carefully consider all the underwriting metrics discussed in this article but do so expeditiously so we can help commercial real estate investors quickly obtain the financing they need. Our short-term bridge loan and intermediate bridge loan products are ideal for a variety of circumstances and property types. 

Not sure where to obtain your loan? Compare your options with our guide, Financing Single-Family Rental Portfolios Through a Private Commercial Real Estate Lender vs. a Bank.