While purchasing, rehabilitation and renovating commercial properties are the most common uses for commercial mortgage bridge loans, there are other processes in which this short-term financing option can assist with.
Since commercial mortgage bridge loans is in some ways a quick bridge funding primarily asset-based, a borrower may be able to use one to purchase a property at a time when his credit profile is less than ideal.
In an industry that can result in large risks in important underwriting ratios like debt-to-income (DTI), debt service coverage (DSCR), and even result in mechanics lien, a not-so-ideal credit profile isn’t that synonymical to “bad credit.” A commercial bridge loan can allow borrowers to have temporary financing which duration lasts long enough for the borrower to find resolutions for other credit issues in order to gain permanent financing at a later date.
Commercial bridge loans are also ideal for borrowers when they have an opportunity but are situated within time constraints and need to secure financing promptly.
Commercial mortgage bridge loans can serve their purpose to purchase and industrialize raw land, to demolish existing structures and erect a new one, or for purchasing, renovating and selling existing properties known as the fix-and-flip loans. Compared to blanket mortgages, commercial bridge loans apply only to a single property and have a due-on-sale clause.
How Do Commercial Mortgage Bridge Loans Work?
Commercial bridge loans are functional to lenders making riskier loans for short periods of time. While providers or permanent commercial real estate financing will lend based on current Loan To Value, commercial bridge loan providers will lend based on Loan To Value or After-Repair-Value. This financing strategy allows borrowers to bet on the property’s future value, not its current value.
A commercial bridge loan works best when the borrower is acquiring their target real estate at a large discount, most likely due to bad condition or failed management. Once a borrower fixes eyes on his target and reasonable estimates of the necessary renovations to bring the property upgraded to the standards, he is now ready to apply for quick bridge funding.
The lender, on the other hand, will evaluate not only the physical conditions of the property and renovation plans but also the property’s market. These pertain to the real estate market and job market before deciding to approve or reject the project.
If the bridge loan is approved, the lender will determine costs for the loan based on the risk involved. Unlike permanent commercial real estate financing, bridge loans are highly customized products, so the rates and terms can are highly flexible and vary significantly.
Rutchel Cusi is a licensed real estate agent who regularly writes about topics involving commercial realty and finance.