Transitioning from Bridge loan to Traditional (commercial)
New York City · Member since 2018 · 43 posts · 13 votes
Hello BP members,
* tried searching BP for a definitive answer and couldn't find one*
* I need some help understanding the process of moving from Bridge-loan to Traditional-loans* I'm practicing running proForma-charts and evaluating properties ( * using fake Examples to drill in the concepts*).
Can someone explain how exactly would one transition from a Bridge loan to a more Traditional loan?
For instance, If I acquire a property using Creative Financing ( Master-Lease etc..) and were to get a Bridge-loan based on the Asking price of a property, I would then use that money to increase value ( renovations, CapExpenditures etc...).
...Now when I've stabilized the property and I'm ready to move to a traditional-loan, Can I use the money from the Bank's traditional loan to pay off the Bridge loan?...what can be done if the property isn't Cash-flowing enough to provide the bank with a down-payment for the traditional-loan?
In addition: I would assume that it would make sense to use the same lender for both the Bridge and Traditional loan, correct?
Any assistance would be greatly appreciated.
A bridge loan is mostly used when doing some major renovations in order to stabilize the property. When going into a bridge loan you need to understand what the current and future value of the property will be in order to be able to refinance or sell out and get your money back out. Bridge loans are expensive. Usually 1-2% of the loan up front, plus attorney and other fees (count on 5-8% of the purchase price), 7-9%+ interest floating based on LIBOR, 1-2% exit fee. With that, though it may still make sense to use one if the property is a good fit.
For refinancing, you will go to a local bank or use Fannie/Freddie, CMBS or HUD. If you used a mortgage broker to get the bridge loan, they will help you get set up with a permanent loan. This refinance will then payoff the bridge loan and possibly provide you some equity back.
What is the property isn't cash flowing enough to payoff the bridge loan? Get it cash flowing enough or be prepared to some to the closing table with your own cash. Agency debt won't finance you unless you have 90% occupancy - typically for 90 days. Local banks will finance you, but will look at your current performance to be sure you are at 1.2+ debt service coverage.
The bridge lender in most cases will be different from the permanent lender.
Now, if you are getting seller financing, just stick with that until you can finance into permanent. Why finance out of seller into a bridge into a perm?
In my opinion bridge loans are the last resort. Try for a local bank construction loan or seller financing if the property doesn't qualify for agency or traditional bank financing
A bridge loan is mostly used when doing some major renovations in order to stabilize the property. When going into a bridge loan you need to understand what the current and future value of the property will be in order to be able to refinance or sell out and get your money back out. Bridge loans are expensive. Usually 1-2% of the loan up front, plus attorney and other fees (count on 5-8% of the purchase price), 7-9%+ interest floating based on LIBOR, 1-2% exit fee. With that, though it may still make sense to use one if the property is a good fit.
For refinancing, you will go to a local bank or use Fannie/Freddie, CMBS or HUD. If you used a mortgage broker to get the bridge loan, they will help you get set up with a permanent loan. This refinance will then payoff the bridge loan and possibly provide you some equity back.
What is the property isn't cash flowing enough to payoff the bridge loan? Get it cash flowing enough or be prepared to some to the closing table with your own cash. Agency debt won't finance you unless you have 90% occupancy - typically for 90 days. Local banks will finance you, but will look at your current performance to be sure you are at 1.2+ debt service coverage.
The bridge lender in most cases will be different from the permanent lender.
Now, if you are getting seller financing, just stick with that until you can finance into permanent. Why finance out of seller into a bridge into a perm?
In my opinion bridge loans are the last resort. Try for a local bank construction loan or seller financing if the property doesn't qualify for agency or traditional bank financing
@Todd Dexheimer hit the nail right on the head. And I would agree, if you could get creative financing such as a master lease, that may be a better option vs a bridge. Think of a bridge as a hard money lender.
There is more risk going in. One of them being you don’t know what the lending environment or 10 year treasury will look like in 18-24 months. You’d also have to be confident on the exit value of the property when going to perm.
A bridge loan is mostly used when doing some major renovations in order to stabilize the property. When going into a bridge loan you need to understand what the current and future value of the property will be in order to be able to refinance or sell out and get your money back out. Bridge loans are expensive. Usually 1-2% of the loan up front, plus attorney and other fees (count on 5-8% of the purchase price), 7-9%+ interest floating based on LIBOR, 1-2% exit fee. With that, though it may still make sense to use one if the property is a good fit.
For refinancing, you will go to a local bank or use Fannie/Freddie, CMBS or HUD. If you used a mortgage broker to get the bridge loan, they will help you get set up with a permanent loan. This refinance will then payoff the bridge loan and possibly provide you some equity back.
What is the property isn't cash flowing enough to payoff the bridge loan? Get it cash flowing enough or be prepared to some to the closing table with your own cash. Agency debt won't finance you unless you have 90% occupancy - typically for 90 days. Local banks will finance you, but will look at your current performance to be sure you are at 1.2+ debt service coverage.
The bridge lender in most cases will be different from the permanent lender.
Now, if you are getting seller financing, just stick with that until you can finance into permanent. Why finance out of seller into a bridge into a perm?
In my opinion bridge loans are the last resort. Try for a local bank construction loan or seller financing if the property doesn't qualify for agency or traditional bank financing
Todd ,
Thanks for the thorough response, very-much appreciated!!
@Jeffrey Mcintyre Assuming this post is about MF. Whereas @Todd Dexheimer and @Juan Vargas are correct in their assessment, a reason why bridge loans can be preferred by sophisticated investors is because of the flexibility they allow. Typical agency loans have punitive penalties if selling before the term is up. With bridge loans, sponsors can get in, do the heavy-lift / forced appreciation and sell the property with minimal additional costs.
@Juan Vargas thanks for the additional input. based on your response, I can I'd say that Due Diligence along with a well thought out proforma( using different senarios) is key--thanks!
@Omar Khan Based on your response...how typical is it for a CRE Investor to utilize Bridge loans for such a task?
@Jeffrey Mcintyre Traditional PE shops have a high degree of reliance on bridge or similar loan products. This is because they are not long-term holders, max. holding time < 5 years.