Compared to financing residential property, financing commercial property is a different, often stricter, ball game. Commercial properties often come with higher risk and, therefore, potentially higher prices for lenders and borrowers alike. One great financing solution for commercial properties that your clients should consider is a commercial bridge loan. Read on for everything you need to know about these loans and how to secure one for your client.
What Is a Commercial Bridge Loan and How Does It Work?
A commercial bridge loan is a unique lending solution that provides short-term financing for a commercial property until more permanent financing can be secured. Using a bridge loan lets borrowers bypass the long and intricate loan application and approval processes utilized by traditional lenders like big banks.
Most commercial bridge lenders will be able to get your clients their money in a matter of days—not weeks. From there, borrowers are put on a short-term repayment schedule that can last anywhere from twelve months up to 36 months. Once your clients secure permanent financing, they can pay off the remaining value of the loan.
Office space involves property where companies conduct business without providing access to the general public. Some examples include office parks and high-rise office buildings. Retail property has space where companies conduct business with the general public. Some examples of retail properties include shopping malls and entertainment complexes, like strip malls.
Multifamily involves properties that consist of four or more housing units. Some examples include apartment complexes and townhouse communities. Industrial space involves property where companies conduct industrial business operations without providing access to the general public. Some examples include warehouses and manufacturing plants.
What Are the Pros and Cons of Commercial Bridge Loans?
As with any lending solution, commercial bridge loans come with both pros and cons that borrowers should consider before making a final decision about financing their commercial property.
Pros of Commercial Bridge Loans
Some of the pros of commercial bridge loans include:
Bridge loans provide a speedy financing solution for commercial property buyers that need cash quickly to stay competitive in a hot market. Instead of waiting around to receive permanent financing and risk having the deal fall through, your clients can get their cash quickly and close in no time.
Bridge loans provide more accessible financing for nontraditional borrowers. For example, foreign investors who don’t have U.S. credit reports, tax returns, or income statements often use bridge loans. It is also possible to receive a bridge loan with below-average credit ratings and minor delinquencies.
Bridge loans provide more flexible terms for borrowers. While most bridge loan terms are 18 months or less in length, they can often be extended if necessary. Bridge loan lenders are also more willing to work with borrowers to solve financing issues than traditional lenders are.
Cons of Commercial Bridge Loans
Some of the cons of commercial bridge loans include:
Bridge loans come with higher interest rates than other loan types since they are riskier for the lender.
Bridge loans often come with higher monthly payments since they are short-term in nature.
Bridge loans always come with the risk that your clients are unable to secure the permanent financing they were hoping for.
The pros of commercial bridge loans outweigh the cons in most cases.
What Are the Alternatives to Commercial Bridge Loans?
While bridge loans are a great option for financing commercial properties, they may not be right for everyone. Alternatives to commercial bridge loans include conventional commercial loans, commercial balloon loans, commercial hard money loans, commercial blanket loans, and commercial construction loans. Let’s explore each one in further detail so that your clients can make the right choice for their needs and financial situation:
1. Conventional Commercial Loans
A conventional commercial loan looks a lot like the traditional residential loan your clients likely took out on their houses. These loans often involve fixed interest rates and longer loan terms. However, the loan terms offered by conventional commercial loans are shorter than those offered by conventional residential loans.
While home loans can last 20-30 years in a lot of cases, commercial mortgages will more often fall in the 5-10 year-term range.
Additionally, your clients are going to need a higher down payment for a conventional commercial loan of at least 25% compared to 20% for a conventional residential loan. Finally, interest rates will be higher — typically ranging from 4% to 7%, depending on the borrower’s qualifications.
2. Commercial Balloon Loans
Your clients can use a commercial balloon loan to lower their monthly mortgage payments. While their monthly payments are lower, they’re required to pay a large lump sum at the end of the loan term, also known as a “balloon payment.”
Some commercial balloon loans allow borrowers only to make monthly payments to cover the cost of interest on the loan. Other types allow borrowers to make higher monthly payments to lower the balloon payment. Choosing this option may be a good idea for your clients because commercial balloon loans offer shorter terms typically ranging from three to seven years.
Some bridge loans are similar to balloon loans, like the bridge loans offered at Vaster. These bridge loans offer interest-only monthly payments with a balloon payment due at maturity. However, commercial balloon loans are distinct from these bridge loans because borrowers can have them over much longer terms, such as 30 years.
3. Commercial Hard Money Loans
A commercial hard money loan is a flexible yet expensive way to finance the purchase of a commercial property. These loans are entirely asset-based, and as a result, lenders aren’t totally concerned about the borrower’s creditworthiness or even getting paid back. Instead, they can simply take possession of the property and sell it to get their money back.
Since hard money lenders aren’t as concerned with traditional lending requirements like income and credit scores, this type of loan is more accessible to those with low credit or cash assets. However, borrowers pay for this accessibility in higher interest rates that usually range from 10% to 18%. With such interest rates, commercial hard money loans are typically used on a short-term basis to avoid racking up thousands of dollars in interest.
4. Commercial Blanket Loan
A commercial blanket loan is a great lending solution for investors that hold multiple properties. Managing different payment schedules for a large portfolio of properties can quickly become confusing and overwhelming. Commercial blanket loans allow clients to fold all of these different properties into a single loan.
Since these loans involve multiple properties and high amounts, they are considered a risky investment for lenders. As a result, many lenders do not offer this type of financing for commercial properties. Those who do will charge high interest rates of up to 11% to mitigate some of the risks involved.
5. Commercial Construction Loan
A commercial construction loan is used to finance commercial properties that have not been built yet. Developers can use these loans to cover the costs and materials of construction with the land itself held as collateral. Often, these loans are refinanced into a longer-term loan after the construction process has been completed.
How to Find a Commercial Bridge Loan Lender?
Even though commercial bridge loans are a great financing solution, finding a lender that offers them can be challenging. They typically aren’t offered by traditional lenders like big banks. Thankfully, there are quality bridge loan lenders out there—your clients just need to know where to look.
The best place to look for a commercial bridge loan lender is online. A simple search can bring up some of the best commercial bridge loan lenders. For instance, Vaster is a premier bridge loan lender.
Once your clients have found some possibilities, they then need to vet these lenders carefully. Ask for references or look at customer reviews. Read over the loan documentation beforehand and ask for clarification on any questions that your clients may have. Make sure that lenders are responsive and transparent before signing on the dotted line.
How to Apply for a Commercial Bridge Loan?
Perhaps the biggest advantage of choosing a commercial bridge loan relates to the application process. Applying for a bridge loan is typically easier and faster than other loans, although the exact process varies depending on the lender.
When applying for a bridge loan with Vaster, borrowers can submit an initial request quickly and easily online. Your clients will need the loan amount and loan purpose along with additional details about the property, including estimated value, property type, and property address. Finally, your clients will need to fill in their personal contact information so we can reach back out to them within 24 hours.
From there, we will process their application using additional documentation and requirements. We will run their credit report to get a better idea about their credit history. We may also request documentation, including tax returns, bank statements, and income statements. With that said, we take a “big picture” approach when making approvals rather than requiring a certain credit score or liquidity amount.
What Are the Interest Rates Offered for Commercial Bridge Loans?
The interest rates for commercial bridge loans vary depending on the lender and your clients’ financial qualifications. However, borrowers can expect to pay anywhere between 6% to 10%.
These rates are not credit score-driven, as a borrower might assume. Instead, the rates vary based on origination points, loan terms, loan-to-value (LTV) ratio, and the borrower’s liquidity—meaning their cash and investment accounts.
Origination points, LTV, and loan terms will primarily determine the interest rates, while the liquidity will decide whether an interest reserve holdback will be required.
How to Get the Best Interest Rate for a Commercial Bridge Loan?
If your clients are looking to secure a competitive interest rate of around 7.5% for their commercial bridge loan, here are some things they can do:
Shop around: Different lenders offer different interest rates. As a result, it’s always a good idea to shop around and get quotes from multiple lenders before making a final decision. Generally speaking, borrowers should get quotes from five lenders to ensure that they get the best rate possible.
Consider closing costs: Sometimes, it may seem like your clients are getting a great interest rate, but they’re paying more in closing costs instead. For this reason, borrowers should always obtain information about the required closing costs for their commercial bridge loan before deciding on a lender.
Make a higher down payment: Increasing the amount of your client’s down payment can help them get a better interest rate on a commercial bridge loan. By increasing their down payment amount and decreasing the total loan amount, they’re reducing the risk for the lender—a move that will be rewarded with a lower interest rate.
Increase your cash assets: Many bridge loan lenders consider cash assets when processing an application. If your clients want to decrease their risk and lower their interest reserve, they should try to increase their cash assets to cover more of their loan payments if needed. Although this won’t impact their interest rate, it may waive the interest reserve requirement altogether.
Wrap Up on Commercial Bridge Loans
Commercial bridge loans allow commercial investors to make competitive offers on properties and close quickly. Working with an experienced, flexible, and responsive lender like Vaster can help make your clients’ commercial real estate investing dreams come true.