Commercial bridge loans provide opportunities to businesses that may not otherwise have been able to purchase real estate. Maybe the property requires work before a bank will finance it or the business owner needs time to repair his credit. Whatever the reason, this type of loan is a temporary solution until either cash can be paid or other means of financing can be found.
The typical terms of bridge financing are between six months and three years. When the term of the loan has ended, the property must either be sold or be in receipt of regular financing. These loans can be used to purchase a wide variety of commercial real estate, including multi-family dwellings, hotels, offices and retail structures.
Bridge loans are short term because they are a risk to the lender. For added protection, a lender will base the value of the property and loan on the improved value of the property rather than its current state of disrepair. Your job as the recipient of the funds is to provide estimates of the improvements needed prior to applying for financing.
If the lender approves your application, the lender will base the terms of your loan on the perceived risk of financing the project. This leaves a lot of area for variation. Costs to consider will include origination fees, closing costs, length of the loan, and loan amount. Lenders typically won’t finance a property valued less than $1 million.
Lenders will have different qualification criteria, but you can be sure they’ll want to know about your experiences in similar projects as well as your credit score. Your net worth will need to be at least equal to the requested loan amount and required documentation will be extensive.
Your ability to handle the new debt is the most important qualifier. A calculation called debt service coverage ratio (DSCR) will assist the lender in determining your ability to make payments on the loan. Most banks and some mortgage brokers provide bridge loans and the minimum amount and term will vary from lender to lender.
If you find a property that shows significant potential but is in need of substantial improvements, it can work out to your benefit to obtain a bridge loan to restore the property and increase its value. Bridge loans are a good fit for many different types of commercial properties which can provide you the reward of a restored property as well as additional income.