What to look for in a bridge lender
So tell me what you want, what you really really want. A want a… reliable bridge lender!
Whether you are purchasing an asset and time is of the essence, looking to reposition an existing asset which will take significant work, or simply need to buy some time to increase cash flow before refinancing, your situation may call for a bridge loan.
Bridge loans typically carry higher interest rates which make them uncompetitive on a pricing level with stabilized loan options, but what you’re paying for is the flexibility and short-term nature of a financial product designed to do exactly what its name entails: bridge you to a next milestone.
Here’s what you should be prioritizing in a bridge lending partner.
Situations requiring a bridge loan are by definition riskier than core/stabilized assets, so the first thing to prioritize is avoiding further risk in your choice of lending partner. Work with a credible lender with a track record, and incentives aligned to your own. There have been some lenders over the years who took on a “lend to own” mentality, meaning they actually would prefer their borrower to default, because they can then take back the collateral posted (your building). We are living in the information age that allows you to research other transactions that the lender has been involved on and how they’ve handled different situations, but you’ll also want to rely on trusted advisors and relationships if you’re working with someone new. The best bridge lenders look beyond a property’s current financials, and look for a quality borrower who can execute on their plan.
Speed & Flexibility
Banks, CMBS conduits, and government agencies all typically take 60+ days to close a loan. They have official, often strict procedures in place for monitoring a loan and approving changes to an asset or construction timeline.
The right bridge lender can help you close quickly with confidence. They can also support the necessary adjustments and decisions needed on a ground-up, transitional, or under-performing asset, without the red tape of a larger, more regulated institution.
Alright, now we’re finally getting to something you can see on a term sheet. Interest-only is pretty standard in the bridge lending world, and it helps enable cash flow in the property despite the higher interest rate.
When working with your local bank relationship on transitional or short-term financing, they may offer you an amortizing loan, and you should recognize whether that’s the most suitable arrangement for an asset without strong initial cash flow.
Finding your match
Go on any bridge lender’s website (and if they don’t have a website, return to the first point above about the need for trust), and you’ll generally find a few common elements: a very wide footprint (nationwide!), assurances of expertise, and promises of flexible terms at competitive rates. As a matter of fact, there are more bridge lenders and debt funds out there in the market today than there ever have been before, and their marketing would lead you to believe that you can walk right in to any one of them and they’ll partner with you in whatever way you need them.
But do you want to know the truth? Two bridge lenders with nearly-identical marketing may actually approach the market quite differently. They have a different cost of capital, different underwriting priorities, and different areas of expertise. There’s a time and place for the big-city bridge lender with 7.5% I/O rates, and a time and place for a local 10% lender. Running a competitive loan process without aiming for the ideal lenders and having them submit terms in the same week takes away the advantage of speed and efficiency.
At StackSource we’ve onboarding a large number of reputable bridge lenders with different profiles that review each of our loan submissions. We work with borrowers to position their loan request correctly so as to get the fastest accurate quotes from our lenders, which enables the borrower to focus on what they do best: putting together their deal. As is only possible with our model, borrowers will often be able to close the right bridge loan within our core lender network, which means closing with no fee.