Q&A: Commercial Bridge Loans in 2017
- Apr 05, 2017
Real estate investors and developers are increasingly turning to commercial bridge loans as a source of capital due to CMBS maturities and increasing interest and capitalization rates in 2017 and 2018. Bob Sullivan, a partner in Alston & Bird’s Finance Group, agreed to talk to us about the benefits and pitfalls of the bridge product.
“Acting as a transition to permanent financing and a runway to restabilization of distressed properties, these flexible loan arrangements are on the rise because they provide a strong alternative for short-term financing until an exit strategy can be executed,” Sullivan said. “Borrowers not yet able to qualify for permanent financing, or those who are looking for quick financing for property upgrades, should explore this niche market as a potential option. That said, developers should note the high risk involved in bridge lending, including the increased cost of capital.”
MHN: In what situations are bridge loans most appropriate for a borrower?
Sullivan: A bridge loan is a shorter-term financing product with terms that typically run three years, with short extension options of an additional one or two years available in some circumstances, provided certain thresholds are met (payment of extension fees, compliance with financial covenants, etc.). A bridge loan is most appropriate for borrowers whose business or execution plan on an asset closely matches or mirrors the terms and conditions that a bridge loan product offers: generally a shorter execution cycle with no or minimal prepayment fees or restrictions. Bridge loans can generally provide greater cash, but that is accompanied by a higher rate of interest. Nothing is free.
MHN: What types of lenders are most active in bridge lending?
Sullivan: Most lenders offer some form of bridge product. They may call it different things, but it’s still a bridge product. Recently, funds have become more active, as the rates that can be derived from bridge loans are starting to fit more and more with fund return and hold underwriting criteria. A rising rate environment coupled with the availability of cash in the market have been contributing factors to this.
MHN: What are the benefits and pitfalls of the bridge product?
Sullivan: The benefits are that bridge loans may be the only viable financing source for some deals with no traditional risk profiles. We will see more and more of this, as the traditional face of regional retail has changed and assets are being repurposed. The downside to this are higher interest rates and the potential inability to refinance out when the loan becomes due. An asset may be well suited for bridge financing but not so much for what has been traditional permanent financing.
MHN: The multifamily debt markets are very deep—do apartment owners need a bridge lending market?
Sullivan: Absolutely. Bridge loans have been an excellent resource to allow borrowers to access advances for major capital property improvements, which in turn can qualify some assets for permanent financing that otherwise may not have been available. If properly underwritten and documented, a move from bridge to GSE financing can be a very viable exit strategy. Multifamily fits this profile well.
MHN: What are the best practices for originating bridge loans?
Sullivan: No different from more permanent loans: solid underwriting, solid diligence on the underlying asset being financed, solid documentation and post-closing monitoring. The bridge product is a good fit for transitional assets, with the caution being to focus on the diligence of the transitional nature of the assets financed.
MHN: How can investors take advantage of the exit strategies available for bridge financing?
Sullivan: An active bridge lending market gives borrowers more choices on term, rate, advance amounts, loan amounts, and representations and warranties offered by the borrower. More favorable financing conditions can only benefit investors in bridge products, and a properly functioning capital market works for everyone.