Bridge Loans in the Current Market
How to Use Bridge Loans
As we approach the one-year mark for this pandemic, we wanted to share with you how some commercial and multi-family landlords are utilizing bridge loans to help secure financing. Bridge loans are short-term loans used to “bridge” the gap to stabilization and either a longer-term hold strategy or a sale of the asset. We have seen a significant increase in bridge loan requests due to the effects of COVID-19. Bridge loans typically have shorter durations of 12-36 months and are put in place to “bridge” a specific issue(s).
Why would a borrower utilize bridge loans instead of a conventional loan?
In a value-add opportunity, an investor seeks to maximize their return by stabilizing an underperforming asset. A bridge loan is a way for an investor to bypass a constricted level of underwriting from a conventional lender. Underperforming assets typically have difficulty meeting the criteria for conventional financing because they experience changes such as less than market rents, issues with tenants not paying, vacancies, and tenants that do not extend their options for lease renewal among other issues.
Debt Funds and Private Money lenders have loosened levels of underwriting that may come with no DSCR requirement, or a minimum of 1.0x, while also providing investors with higher Loan to Value ratios. Some lenders offer loan programs that implement a bridge to permanent financing structure where the lending institution offers a bridge loan for the purchase and stabilization of an asset with a conversion factor at the end of the bridge term to permanent financing. Many of these instruments provide additional capital or “good news money” to the investor for lease-up/TI&LC and other stabilization costs as they execute on their business plan.
Ease of Process Timing
In the case of ease of the process, bridge financing generally tends to have quicker timeframes to close and less documentation. If an investor wants to make an offer on a commercial property that needs to have a quick close, but they cannot make an all-cash offer, the investor can utilize a bridge loan to help with this. The faster application and review periods that bridge lenders have to offer provide a competitive advantage over conventional lenders that could potentially drag out the closing timeframe.
This gives the investor the chance to capitalize on their purchase, perform any necessary stabilization efforts, and begin the process to secure permanent financing afterward. For cash-out refinances, a borrower may find themself in a financial bind where they need to access capital quickly. Bridge lenders can accommodate these scenarios with their speed and efficiency, allowing that borrower to tap into existing equity and refinance the first position lienholder or could be placed as a second position loan.
Covid-19’s Effect on Commercial Loans
Covid-19 has brought on a set of challenges for Commercial and multifamily loans. The effects of COVID-19 on mortgage loans is causing problems for both commercial and multifamily landlords. The statewide lockdowns, reduced occupancy levels for retail, and outdoor and take-out dining regulations, attributed to business closures and tenants’ inabilities to pay rents. It also created job losses making it difficult for apartment tenants to pay rent. This caused commercial and multi-family landlords to feel the squeeze of making their mortgage payments. While some lenders initially offered assistance to help borrowers make it through, those were only temporary loan modifications that have returned to regularly scheduled mortgage payments.
These same commercial mortgage lenders were having difficulty underwriting refinance requests as the commercial properties on their books were not producing any income because of the challenges they were facing. Bridge lenders stepped up as an important way for commercial landlords to refinance these loans that were coming due. This has given the landlords the ability to access capital and hold them over to give time to fill vacancies. It should be noted that not only are bridge lenders tapped to help owners in distressed situations, but they are there to help facilitate opportunistic buyers who have been on the sideline waiting for the type of disruption in the market we are seeing due to COVID-19. Bridge lenders are the backbone of short-term transitional financing and they provide the speed and agility to investors to take advantage of any dislocation in the market.