Checklist: How to land a commercial bridge loan
There are several uses for a bridge loan in commercial real estate. Bridge loans can help close an acquisition deal more quickly than a permanent lender (like a bank), fund a more risky value-add deal, or provide intermediate funding before another liquidity event (like a sale or permanent refinance).
The requirements to receive a bridge loan are a little less stringent, and certainly more flexible, than receiving funding on a similar deal from a bank. But that doesn’t mean you won’t need your ducks in a row to get one — after all, if you’re seeking a bridge loan, there’s a reason you’re not going with lower-cost options.
We see a lot of loan requests for different loan scenarios, so we’d like to share a high-level checklist of what our bridge lending partners are typically looking for. Hit these major points, and your loan request will go more smoothly. They all start with P, just because.
First things first: it’s the property. Share the exact address, what it is, and its current state. Are you looking for funding on raw land? Is there a vacant property? A retail property with some tenants already in place?
If there is a building, what is the occupancy? What year was it built, and when was it last renovated? Do you own it, or have it under contract to own?
If the lender is confused about what they’d find if they visited the property, you’re not off to a good start.
In most bridge loan scenarios, the current state of the property is not the end goal for the investor. There are several viable plans that resonate with bridge lenders, and they’ll want to know which one they are dealing with:
- No major changes to the property, but planning on leasing it up to tenants in current state.
- Renovation — the property will require $X of construction updates, after which you will lease up the property at $Y per unit or per sqft.
- Complete re-positioning — the building is currently a shopping center, and you’re planning on turning it into something else (and be specific).
- No major changes to the property, and the cash flow is already fine, but going with a bridge loan for flexibility to sell the property soon.
Your plan should include financial projections (pro forma) and an explanation of the steps that you will go through in order to achieve it.
If the plan is to reposition an old warehouse into apartments, what relevant experience can you point to that the execution of the plan is in good hands? Have you completed another major repositioning project? If not, have you at least profitably managed multiple apartment properties?
This is about establishing credibility. Your portfolio of current and past projects need to help you pass the initial “smell test” for the bridge lender as you eventually look to develop a trusted relationship.
The next section in the lender’s underwriting will revolve around the borrower’s financials. Requirements will vary by lender and by scenario, but the main idea is that the borrower needs to have enough net worth, and enough liquidity, to protect the property from bankruptcy in a downside scenario. The more risky the project, the higher the lender’s requirements will be for net worth and liquidity. Credit score and history of bankruptcies will also be examined here.
Now, for a non-recourse loan, the borrower’s money is not at risk beyond what they’ve already invested into the property (barring any bad behavior), so the personal financials will be less of a concern in underwriting.
What makes your deal unique or difficult? Don’t hide these deal points! “Hairy” pieces of the deal will almost always come out through an underwriting and loan closing process, so it’s better to establish that information up front, instead of waiting for a lender to discover it later. If displaying your performance history is what establishes credibility, then hiding the deal’s pain points is what destroys it.
Bridge lenders are often very small organizations that have a lot of autonomy over their lending decisions. So it will come down to a person making a decision, and humans are emotional creatures. If you hit each of the points above, the last step may simply be to persuade the lender to trust you. After all, they aren’t just investing into the building, they are investing into a building owned by you.