Commercial Real Estate Bridge Loan. All You Need to Know

commercial real estate bridge loan
Updated - 2022.05.14

Imagine that you have found the ideal office building to purchase, but you won’t have the necessary funds to complete the transaction until you’ve sold the property you already own. Or, perhaps the completion of your home improvement project is taking significantly longer than anticipated, but the payment on your balloon loan is due over the next few weeks.

You can raise funds quickly through bridge loan financing in scenarios similar to these and others like them. This article will explain the operation of bridge loans for commercial real estate and the role that bridge loans play as an alternative source of finance for commercial real estate.

What Is a Bridge Loan in Commercial Real Estate?

commercial real estate bridge loan

A bridge loan, also known as a gap funding or gap loan, is a type of short-term loan that bridges the financial gap created by the time it takes to either secure a long-term mortgage or sell the property to settle the bridge loan. 

In most cases, it takes anywhere from three months to one year. You can put them toward purchasing commercial real estate or improving the borrower’s existing property. Various commercial assets are eligible for commercial bridge loans, such as apartment buildings and offices, retail, and industrial properties.

There is a possibility that the business property in question is either a brand-new building that is currently under development or an existing facility. The borrower might want to sell the home soon to pay off the debt, or they want to keep it as an investment.

On the other hand, a term loan greatly concerns long-term financing and bears no resemblance to a commercial bridge loan. A borrower can take a term loan for an extended period and repay in installments for a couple of years. There are some types of term loans that can last for up to 30 years. The long term refers to how anything can take place over an extended duration, typically measured in years or decades.

Benefits and Drawbacks of Commercial Real Estate Bridge Loan 

commercial real estate bridge loan

A bridge loan for commercial real estate comes with several benefits; however, there are also some potential negatives that you should know.

The benefits of obtaining a commercial bridge loan

  • Make immediate financing available to purchase a property or fulfill an existing obligation.
  • The optimal alternative is a commercial bridge loan when time is of concern because of the more reasonable funding duration.
  • The sustainability of the purchase or remodeling project receives more consideration from bridge loan lenders than the borrower’s credit score does. It’s because bridge loan financiers are more ready to think flexibly than traditional lenders.

Drawbacks of obtaining a commercial bridge loan

  • When applying for a commercial bridge loan, the property used as collateral must also be the property borrowed against; this puts the investment at risk if the borrower defaults.
  • If the borrower does not submit bridge loan payments on time, the borrower’s other property used as collateral may also be at risk; however, unsecured bridge loans are available for those borrowers who meet the requirements.
  • Higher fees, both initially and when repaying the loan, can put the borrower in a difficult financial position.

Use a Commercial Bridge Loan to Your Advantage

Commercial bridge loans finance the acquisition and upgrading of commercial real estate most of the time. Compared to alternative forms of finance, a commercial bridge loan may be preferable for several reasons:

  • The property has insufficient occupancy rates 
  • There is room for improvement in the borrower’s credit profile.
  • Because of time constraints, the borrower cannot wait for permanent finance.
  • There is either a lack of completion of ownership interests or an absence of a project team.

Commercial Real Estate Bridge Loan. How Does It Work?

commercial real estate bridge loan

Before deciding whether or not to grant a loan, the lender will evaluate the applicant based on several criteria. 

One of the things that the lender will check for the time being is the loan-to-cost ratio (LTC). The most significant percentage of the overall cost a lender is willing to finance to a borrower is known as the LTC (or the loan-to-cost ratio). The majority of lenders set the LTC anywhere between 70 and 80%.

Consider this example: You have set your sights on acquiring a piece of real estate costing $100,000. The creditor is willing to provide a bridge loan with an LTC of 80%. It signifies that the lending institution will give you a loan for $80,000, and you will be responsible for coming up with the balance of $20,000.

The lender will decide on your bridge loan’s interest rates and other terms. The moment the lender accepts your application for a loan, they will transfer the funds to your account so you can complete the transaction. If you were to buy the property described in the previous example, you would have to make payments following the terms of the agreement. The only alternative would be to obtain a mortgage or some other form of long-term funding that would cover the principal, the interest, and any fees that the lender mandated.

Remember: the specific piece of collateral for a loan is the piece of property acquired with the funds obtained from the loan. If you do not live up to your promise to pay the lender, the creditor has the legal authority to seize the property and sell it to regain the money it has lost.

Main Features of Commercial Real Estate Bridge Loan 

Closing Duration

When time is of concern, an investor can move swiftly, thanks to the availability of a commercial real estate bridge loan, and then organize for permanent financing after closing the bridge loan.

Fees and Interest

The costs and fees involved with closing a commercial bridge loan typically consist of appraisal and escrow fees, expenditures related to purchasing a title policy, and administrative and loan origination fees. Although the interest rate will change depending on the borrower, the lender, and the particular loan terms, it will often be higher than the prime rate for a conventional loan.

Prepayment Penalty

There is no prepayment penalty associated with a commercial real estate bridge loan, and the payback terms often range from three months to one year or longer. It can be advantageous for real estate investors to pay off a bridge loan in advance without suffering any fees or other penalties.

Loan Qualification

There is a possibility that bridge loan lenders will impose a minimum credit score requirement. However, they will also consider other criteria concerning loan qualification, such as the borrower’s track record and other assets, the debt-to-income ratio (DTI), the investor’s business plan’s validity, and future refinancing and repayment plans.

The Bottom Line

It is essential to know that commercial bridge loans, although they are an ingenious remedy to a prevalent financial problem, also come with their due proportion of hazards. Even though the loans are a brilliant solution to the problem, that’s the case.

Businesses frequently take out bridge loans for commercial real estate if they cannot repay the associated high-interest debt. Because of this, if you are thinking about applying for one of these loans, you need to be very specific that your investment will be profitable to ensure that you will manage to pay back the debt.

The decision regarding whether or not this kind of loan is appropriate for you rests solely with you. Before deciding to go with a commercial real estate bridge loan, it is important to exhaust all of your other possible sources of finance first. To identify the most desirable and cost-effective funding option, you will want to investigate various products.

Mortgage Calculator » Commercial Real Estate Bridge Loan. All You Need to Know
Mortgage Calculator GURU
Logo