Times of transition call for a loan designed for these temporary circumstances. The best solution in many cases is what’s known as a bridge loan. Learn more about these financial products and why they’re an attractive option in a variety of situations.
What is a bridge loan?
A bridge loan is a commercial real estate loan that offers short-term funding during a transitional period to meet immediate financial needs until the sponsor fulfills an obligation or secures more permanent financing.
Bridge loans are popular in real estate investing since real estate transactions often involve time-sensitive circumstances or urgent funding demands. Obtaining a traditional loan in these circumstances may not be feasible, making a bridge loan a valuable solution.
How does a bridge loan work?
Bridge loans can deliver funding in short order. These loans tend to have more flexible terms compared to traditional bank loans, which often means investors can close on a bridge loan in less time than it would take to complete the extensive underwriting and closing procedures that go into a more traditional loan.
Though bridge loans are known for being more flexible, they are not without requirements, so borrowers must ensure they meet all of these requirements and submit all the necessary information to qualify for the loan.
When they request a bridge loan, sponsors should know how they plan to use the bridge funding, whether it’s for an acquisition, renovation, or other need. It’s also helpful if the sponsor has an exit plan for when the bridge loan matures. For example, they may plan to transition to a long-term loan once the property is stabilized, or they may plan to sell the asset. Some borrowers may not know their exit plan just yet, which is not necessarily an issue. These borrowers should seek out a loan that offers enough flexibility to allow for a variety of exit scenarios.
When is a bridge loan beneficial for real estate investors?
There are a variety of circumstances where a bridge loan makes sense for a real estate investor. Some common scenarios include when an investor has one of the following needs:
Capital Expenditures for a Value-Add Play
One reason to obtain a bridge loan is if a borrower needs capital expenditures for a project that can help them maximize their revenue potential. For example, they may be purchasing an underperforming asset requiring renovations. By completing the renovations the Borrower can then increase rents thereby increasing the Property’s value.
The pandemic had significant repercussions for commercial properties, such as retail stores, hotels, and offices. Reappraisals of commercial properties across the U.S. have shown billions of dollars in property value losses. Investors can use bridge loan funds to restore these distressed assets and their property value.
Time-Critical Funding for an Immediate Need
In some cases, investors may need funding right away—sooner than they can obtain long-term financing through a traditional loan. For example, they may need to close a deal by a certain deadline, or they may need to quickly fund a lease-up or ramp-up period to improve occupancy.
Because of their more flexible parameters, bridge loans can also be helpful for investors who need immediate funding but must remedy credit issues before qualifying for long-term financing.
Financing for a Discounted Loan Payoff for a Distressed Property
When a property decreases significantly in value, a lender may negotiate a discounted payoff (DPO) with their current lender. This allows the borrower to pay off the loan for less than the outstanding balance.
However, this arrangement usually requires the borrower to pay the negotiated price in one lump sum within a tight deadline. Raising the necessary capital in time can be difficult, but a bridge loan can provide fast financing to make a DPO possible.
Find the right bridge loan from the right lender
Verus Commercial Real Estate Finance (VCREF) is a private lender borrowers can trust for fast bridge financing with flexible terms. We offer a Short-Term Bridge Loan and an Intermediate Bridge Loan. We also have a bridge loan program tailored to single-family rental portfolios.
Borrowers can start with a Short-Term Bridge Loan and roll this loan into the three-year Intermediate Bridge Loan if they qualify, allowing them to take advantage of a longer term and lower rate. Qualifying SFR investors can even transition from a maturing SFR portfolio bridge loan to an SFR Permanent Loan.
Want to learn more about the differences between financing your investment through a bank versus a commercial real estate lender? Download our guide today!