Bridge Loans for Commercial Real Estate

by A. Heinrich

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As one can guess from its name, the primary purpose of this type of commercial mortgage is to act as a financing bridge between acquisition or development of a property and a permanent, conventional take-out loan. These are short-term loans, usually with balloons between three months and three years.

An example of a bridge loan scenario is as follows: A borrower wishes to purchase a hotel, and is approved for a conventional SBA loan contingent upon two years of successful business operation. In order to fund the purchase the borrower arranges for the seller to carry back 30% of the purchase price, and secures a bridge loan for the remaining 70%. The bridge loan allows the borrower to acquire the property and establish the operating history necessary for long-term financing.

"Bridge loan" is a general term applying to the use of funds rather than the funding source or guidelines. Consequently most private money loans and even conventional mini-perm loans are bridge loans in a sense. Normally, however, the term "bridge loan" is associated with unconventional programs, i.e. private- or hard-money programs. For example, because the borrower in the above scenario does not have significant cash equity in the property, he would most likely have to go to a hard money lender and a consequent 11-14% rate plus 3-5 points. If, however, he were able to make a 30% down payment, he might be eligible for a conventional mini-perm loan from a bank (provided his assets and credit were also up to snuff) at 1-3% over prime plus 1 point.

Examples of Bridge Lenders

• 1st Bridge
• Fairfield Financial Services
• Mountain Funding

References:

• Investopedia
• Wikipedia

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