All About Bridge Loans

Bridge loans are a short term loans, which are often used to either turn a business around or secure a new property/opportunity.  They are mostly secured by either commercial or residential real estate.  Borrowers that are use to typical bank loans are often surprised by the terms and procedure that are required with bridge loans. 

For example, most bridge loans max out a 60 – 65% loan to value.  And if you have a special use property like a restaurant, you will most likely not find financing beyond 50% loan to value, due to the credit crisis.  One of the biggest issues with loan to value and bridge lenders terms in general is that they normally go off a much lower value than borrowers are use to.  If you think your property is worth $2,000,000, they’ll most likely say it’s worth $1.5. 

Bridge Loans – Value

Bridge lenders look at value in terms of what will they be able to sell the property for in 2 – 4 months with the borrower gone, windows broken, utilities cut, i.e.

Terms from Bridge Lender

If you have received a term sheet lately from a bridge lender you may have also been surprised by the double digit rates and high points that the lender asked for.  This is market.  If you have a very clean deal, on say an apartment building or office complex the best you can get is 2% points and a rate at 9.95%.  On the business turnaround situation where the borrower needs to consolidate debt and pull cash out to recapitalize the business the borrower  should expect terms at 3% -10% points and a rate 13% -18%.  We see rates like this much more often than on the apartment building example. 

All of these bridge loans are interest only and normally have terms between 12 -24 months.  Borrowers should be conscious of what the extension periods are (if any are offered) so that they can curtail potential issues. I.e. what happens at the end of the term and the borrower can’t sell or refinance the bridge loan?