Imagine finding a great deal on a commercial property, but fierce competition forces you to act fast or risk losing the opportunity. In times like this, a bridge loan could be just what you need.
What is a commercial bridge loan?
A commercial bridge loan is a short-term loan designed to “bridge” the gap between a property’s acquisition, construction, or rehab and its eventual permanent financing.
For example, many developers use commercial bridge loans to fund a land purchase and the cost of constructing a new building. Then once the property is stabilized with tenants, they refinance the commercial bridge loan into a more traditional long-term mortgage.
Bridge loans vs. traditional loans
Here are some of the key differences between commercial bridge loans and traditional loans:
| Bridge loans | Traditional loans | |
| Purpose | Short-term financing for transitional needs | Long-term financing for stable properties |
| Loan term | 6-36 months | 5-20 years |
| Interest rates | Higher | Lower |
| Approval speed | Fast (days to weeks) | Slower (weeks to months) |
| Loan requirements | Flexible | Strict |
| Repayment structure | Interest-only with balloon payment | Amortized over the loan term (often with a balloon payment) |
How do commercial bridge loans work?
Typically, commercial bridge loans follow this process:
1. Application
First, the borrower applies for a commercial bridge loan from a lender by submitting an application with property details, financial statements, an investment plan, and other documents.
2. Approval
The lender will either reject the application or choose to move forward by commissioning a property inspection and appraisal. If the results are positive, the lender approves the loan.
3. Funding
Once the loan is approved, the lender disburses the loan funds as a lump sum or in installments according to an agreed-upon draw schedule (often based on construction milestones).
4. Repayment
Over the loan term, the borrower makes regular (typically) interest-only payments until the loan matures, at which point the borrower repays the remaining balance or refinances.
Example of a commercial bridge loan
Now that you understand how a commercial bridge loan works, consider two example scenarios:
Multifamily real estate
A developer purchases a 100-unit apartment complex at 50% occupancy. They secure a commercial bridge loan to renovate and upgrade the property, thereby increasing occupancy to 90%. At that point, they refinance the loan into a long-term CRE loan.
Office real estate
A business owner finds an undervalued office building but needs immediate funding. They get a commercial bridge loan to secure the property while they shop for permanent financing options.
Types of bridge loans
Commercial bridge loans come in different types:
1. Closed bridge loan
A closed bridge loan has a defined exit strategy and repayment date. This means the borrower has a fixed plan to sell or refinance the property by a specific deadline.
2. Open bridge loan
An open bridge loan is a flexible loan without a set repayment date. As a result, the interest is typically higher due to the increased risk.
3. First charge bridge loan
A first charge bridge loan takes a primary lien position on a property, meaning the lender has the first claim on the collateralized property if the borrower defaults.
4. Second charge bridge loan
A second charge bridge loan has a secondary lien position on a property, meaning the lender won’t be repaid in the event of a default until the primary lender has been. These loans tend to have higher interest rates due to the increased risk.
Pros and cons of commercial bridge loans
Before taking out a commercial real estate bridge loan, consider the benefits and drawbacks:
| Pros | Cons |
| Quick approval and funding | Higher interest rates and fees |
| Flexible loan terms | Large balloon payment due after a short period |
| Interest-only payments | Higher risk of default |
Common use cases for commercial bridge loans
Commercial bridge loans can fund many types of projects. Here are a few examples:
- Acquisition. Get a bridge loan to secure a property quickly.
- Construction. Get a bridge loan to finance the construction of a new building.
- Renovation. Get a bridge loan to fund renovations that add value to the property.
- Fix and flip. Get a bridge loan to fund a rehab before you sell for a profit.
How to get a commercial bridge loan
To get a commercial bridge loan, start with the following:
- Get your finances in order. This includes gathering financial documents, credit reports, proof of collateral, etc.
- Have a clear investment plan and exit strategy. This helps reassure lenders that you won’t default on the loan.
- Demonstrate your CRE experience. This shows lenders that you’ve successfully managed and exited similar CRE projects.
From there, you can apply for a commercial bridge loan from various types of lenders:
Banks and credit unions
Banks and credit unions are traditional lenders with competitive interest rates and fees. However, they may have stricter loan requirements and slower loan processing times.
Direct lenders
Direct lenders lend their own capital instead of working with third parties. As a result, they tend to offer more flexible loan terms and faster approvals. However, they may charge higher interest rates and fees.
Online lenders
Online lenders process commercial bridge loans entirely online. This can lead to faster and more convenient loan processing and funding.
What to look for in a commercial bridge loan
When shopping for a commercial bridge loan, here’s what to look for:
- Low interest rate and fees. Make sure they’re competitive and fit your budget.
- Sufficient loan size. The loan amount should be enough to cover your project needs.
- Fast approval and funding. Choose a lender known for approving and funding loans quickly.
- Favorable loan terms. The loan’s duration, repayment terms, and flexibility should be attractive.
- Positive lender reputation. Check reviews from past borrowers to ensure the lender is trustworthy and easy to work with.
- Prepayment incentives. Avoid lenders who charge prepayment penalties and choose a lender who is happy to let you pay off the loan early.
Alternatives to commercial bridge loans
That said, commercial bridge loans aren’t for everyone. Here are some alternative forms of financing to consider:
- Hard money loans. These are short-term loans backed by a hard asset (such as real estate), where the loan amount is determined mainly by the asset’s value. They’re typically offered by private lenders with fewer loan requirements.
- Traditional bank loans. These are conventional long-term loans offered by banks. Though interest rates tend to be lower, loan requirements are stricter, with borrowers needing to demonstrate strong credit, income, and liquidity.
- Private equity financing. This is funding provided by private investors or equity firms. Instead of taking on debt, however, you give up ownership shares of future profits in exchange for capital.
- SBA loans. These are government-backed loans designed for small businesses. They’re issued by conventional lenders but guaranteed by the Small Business Administration (SBA), resulting in lower interest rates and favorable terms.
- Seller financing. This is when the property seller serves as the lender, allowing the buyer to make payments directly to them. It’s great for buyers who don’t qualify for traditional permanent financing or need more flexible loan terms.
- Home equity lines of credit (HELOCs). This is a revolving line of credit secured by a property. Borrowers can pull out funds for smaller financing needs as needed and repay over time.
Conclusion
Ultimately, commercial real estate bridge loans are a valuable tool in an investor’s toolkit. They can be used to secure properties quickly, fund development projects, rehab distressed buildings, and more. By understanding how they work, you’re better prepared to seize good opportunities.
