Top 5 Reasons for Commercial Real Estate Bridge Loans

Floating and fixed rate bridge programs have become popular mechanisms to acquire and rehab value-add properties, but their usefulness does not end there. The bridge space has swelled with capital over the past two years as new debt funds, pension funds, life companies and even banks flood the space. For the investor this has translated to lower spreads and programs tuned to every use case. This article explores the top five reasons we place bridge loans on commercial real estate.

1. Bridge-to-Perm

Typical Leverage 80% LTC

Typical Loan Size $2,000,000 to $100,000,000+

Typical Interest Rate L+225 to L+450

The Bridge-to-Perm execution is most common for the acquisition of stabilized properties. We process a large volume of HUD loans and, while they provide advantageous terms, they also require a longer timeline to close. A bridge facility is utilized to span the gap from the purchase to the closing of the permanent loan. For this type of bridge we engage lenders that have little to no minimum interest period or prepayment penalty. The spreads for this type of transaction are typically narrow because the property is stabilized and cash flowing in most circumstances.

Bridge-to-Perm is also ideal for properties that are not quite ready for permanent financing. An example of this that we've seen more frequently is the acquisition of a property that may be fully leased, but the rents are substantially below market. Low rents in conjunction with low cap rates typically equates to a debt service coverage ratio (DSCR) restrained loan, which can significantly cut proceeds on the acquisition. Bridge lenders will typically look at proforma rents vs. in place rents and will also include a Capex budget within the loan. Bridge lenders are also more comfortable with lower DSCR constraints, with many lenders comfortable with a DSCR less than 1.0x. These loans will typically be sized to ensure they can be taken out with permanent financing once the higher rents are achieved.

Bridge-to-Perm is also ideal for commercial properties that experience large rolls as their current loan matures. Bridge loans can be utilized for additional TI/LC budget and to allow time to retenant and stabilize the property.

2. Expansion of an Existing Asset

Typical Leverage 80% to 85% LTC

Typical Loan Size $2,000,000 to $100,000,000+

Typical Interest Rate L+325 to L+650

We've worked on a number of projects recently where an investor has assembled land or already own excess land next to an existing multifamily or commercial property that they would like to use for expansion. As banks continue to pull back the reigns on leverage, bridge lenders have stepped in to fill the void, typically offering non-recourse loans up to 85% LTC. Bridge lenders are more aggressive on pricing and leverage if there is pre-leasing on commercial properties or significant demand drivers for multifamily properties.

Generally we see pricing reflected by the size of the expansion in relation to the existing operation, pre-leasing, and requested leverage. These programs are most competitive for loan requests greater than 70% LTC.

3. Big Box Repositioning

Typical Leverage 80% to 100% LTC

Typical Loan Size $5,000,000 to $50,000,000+

Typical Interest Rate L+325 to L+900

With the rise of Amazon we've seen the fall of many big box retailers. Shopping carts that were once pushed through 100,000 sq.ft. warehouses are now used on websites for instant checkouts. Additionally we've seen through acquisition and merger the consolidation of grocery stores. The result is dark store fronts at big box retail centers across the United States. This is a huge area of opportunity for investors and developers that have the creativity to transform these empty shells into more viable commercial spaces. We've seen everything from demising the big box into smaller retail spaces, converting to self-storage, or carving out the ceiling and creating more social, experience based retail and restaurant centers.

Bridge lenders in this area will get extremely aggressive, especially in pre-leased situations. There is a growing number of lenders that will provide 100% of the capital stack for pre-leased NNN repositions or NNN build-to-suits. Typical leverage ranges from 80% to 100%. The further you move up the capital stack the cost of capital looks more like equity. For this reason, 80% on a heavy lift bridge loan may be LIBOR + 325, while 100% financing will be closer to LIBOR + 900 with a multiple point fee. Both the developer and tenants are keys to making these transactions successful.

4. Value-Add Rehab

Typical Leverage 80% to 85% LTC

Typical Loan Size $5,000,000 to $100,000,000+

Typical Interest Rate L+325 to L+650

As the yield on cost for new construction projects continues to compress, investors and developers have turned their focus to value-add projects that often require significant rehab or renovation. The loans will be underwritten to proforma rents on the income side and will typically be limited to 80% to 85% LTC. These heavy-lift bridge loans will typically include interest and operating reserves, similar to a construction loan.

Over the past couple of years, spreads have come down considerably for value-add bridge loans. What was once considered a hard money loan, current spreads can be as low as L+325 for a significant rehab project. The other benefit is the non-recourse nature of these loans, which translates to more consideration to the underwriting of the property vs. the sponsor of the project. Most bridge lenders will not require tax returns.

5. Construction Loan Takeout

Typical Leverage 80% LTC

Typical Loan Size $5,000,000 to $100,000,000+

Typical Interest Rate L+225 to L+400

As the commercial real estate bull market barrels forward, many MSA's around the United States are experiencing overbuilding with multifamily and office. As these projects deliver and begin to lease up, developers are finding that they need more runway to provide time for lease-up or have experienced cost overruns that necessitate more debt for construction or TI/LC budget. Similar to the Bridge-to-Perm, construction loan take-outs are typically on completed or nearly completed projects, which removes the construction risk for lenders. Because of this, spreads are narrow and there are very cost effective options in the market place.

There are lenders in this space that are able to roll the bridge loan into their portfolio or conduit program upon stabilization, which often reduces associated fees for the bridge and perm loans.

For more information on bridge programs, please contact our team.

#ValueAdd #Retail #Construction #Office #ApartmentMultiFamily

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