Commercial Bridge Loans: How Do They Work?

Commercial Bridge Loans: How Do They Work?

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Bridge financing, also known as gap financing, swing financing or hard money loans, is a form of short-term financing designed, as the name implies, to bridge the financial gap between current and future circumstances. In the realm of commercial real estate, a bridge loan is typically used until more permanent financing, such as a mortgage, can be arranged. Hard money loans are often used by rehabbers–as in people who repeatedly buy, fix and flip properties.

How Do Commercial Bridge Loans Work?

A bridge loan tides you over financially during the gap in time between the purchase of a property and arranging its long-term financing. Bridge loans usually have terms of between a few months and a year, although terms can sometimes exceed a year. These are collateralized loans; you typically put up some commercial property you already own or will shortly purchase. The provider of a commercial bridge loan will often approve borrowers based on the value of their collateral rather than on their creditworthiness. In this way, a commercial bridge loan is often easier to obtain than is a standard mortgage. The proceeds from a commercial bridge loan can be applied to a property you already own, a property you wish to acquire, or both.

Here are some examples of situations in which commercial bridge loans are used:

Moving a business: You might take out a commercial bridge loan when you move your business to a new venue, such as storefront, office or food truck. The bridge loan can be used for the down payment on the purchase of the new property and perhaps to pay off the remaining mortgage on the old property.

For example, you might wish to purchase a small, under-occupied office building for $1 million and spend another $1 million to renovate it, in order to attract more tenants. Let’s assume the property would be worth $2.5 million after renovation. You apply for a bridge loan from a commercial provider that agrees to lend you 80% of the $2 million project cost ($1 million to purchase the property, plus $1 million to renovate it), which amounts to $1.6 million.

Here’s how the math works: You then must provide the remaining $400,000. The bridge loan has a term of one year. After you complete the project, you should be able to obtain a $2.5 million mortgage on the property, and use much of the proceeds to pay off the bridge loan, both the principal and interest. If you pay 10% interest, your cost for the one-year bridge loan will be $160,000, plus any origination fees, prepayment penalties and other fees.

Buying opportunity: Your company might want to snap up a newly available property before the competition can get it. You can use a bridge loan (or hard money loan) to make the down payment and monthly payments on the new property until you can arrange long-term financing.

Rehabilitation: You might already own a commercial property that is not performing to its potential. It might need extensive renovation or a higher occupancy rate. A bridge loan can finance the remedial work, and then be replaced by long-term financing on the rehabbed property.

Credit score: If your business’ credit score is less than good, you might not be able to access long-term commercial real estate financing. Thankfully, short-term bridge financing might be available. By making timely bridge loan repayments, you might be able to boost your credit score such that you become eligible for long-term financing.

Commercial Bridge Loan Rates and Terms

The following table shows the average terms that apply to commercial real estate bridge loans:

Typical Terms
Loan Amount$1 million - $20 million
Interest Rates9% - 11%
Loan Terms6 - 12 months, but longer periods are available
Loan-to-Value RatioUp to 80%
  • Origination fee: 2% - 6%
  • Appraisal fee
  • Escrow fee
  • Title fee
  • May have prepayment penalty
  • Unamortized:
    • One-time repayment at the end of the term or sooner
    • Interest-only payments each month with a balloon payment at the end of the term or sooner
  • Amortized: Fixed monthly payments
CollateralFirst mortgage lien

How to Qualify for a Bridge Loan

In general, bridge loans are granted based upon the value of the property that serves as collateral rather than on the credit score of the borrower. To limit the financial exposure of its lenders, bridge loans are capped at 70% to 80% of the property’s value. You are expected to provide the remainder as your own equity. Lenders may have other requirements for the property, including its location and condition, and any liens it carries. In addition, the lender will also consider your history of major derogatory events–bankruptcies, foreclosures, liens, lawsuits, felonies and garnishments.

Where to Get a Bridge Loan

You can secure a commercial real estate bridge loan from a variety of sources, including banks, credit unions, private commercial finance companies and peer-to-peer lending platforms. It is often advantageous to obtain a bridge loan and permanent financing from the same source, as you might be able to fashion a better deal this way. If you are a rehabber, you’ll find many hard money lenders on the Internet that specialize in bridge loans to those who flip residential or commercial property.

You should perform due diligence on any bridge loan offers you receive, paying attention to:

  • Origination fees: Upfront fees, often called points, add to the cost of the loan. Expect fees as high as 6%. Comparison shopping might yield a loan with lower fees.
  • Brokerage fees: The Internet hosts many sites that broker your loan to a network of third-party lenders. The broker receives a finder’s fee, usually built into the origination fee.
  • Prepayment penalties: All things being equal, you’d rather borrow from a lender that doesn’t impose prepayment penalties, which can get expensive. For example, one lender imposes a penalty of up to nine month’s interest if you prepay a one-year commercial real estate bridge loan. You usually want to prepay a bridge loan if you sell your existing property before the term has elapsed.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.