In the world of commercial real estate, time is of the essence. Perfect timing may mean the difference in landing a great deal or losing out. Often, it is simply not feasible to wait for permanent financing to be put into place. In this interim, a bridge loan lender can insert a commercial bridge loan to secure the deal until permanent financing can be put into place.
Commercial bridge loans are exactly as their name implications, a way to bridge the gap between securing the property and securing it with temporary financing until more permanent arrangements can be made.
But this type of convenience does come at a price. Since these loans carry a higher risk, they will have a higher interest rates, points, and other additional costs associated with them. It is also common for these loans to carry a higher loan-to-value ratio, and it is common for them to have a balloon payment after a period of a few years.
In order for a lender to participate, they may require additional safety nets on their behalf. Cross-collateralization is one example where collateral for one loan is used for another loan's collateral. Another example might be what is called equity participation. In this scenario, the lender has the opportunity to retain part of the equity. Since they now have a vested interest in the deal, they have an additional incentive and are much more willing to approve it.
On a positive note, unlike the traditional method of financing commercial property, these loans are processed much quicker and require significantly less paperwork than their regular counterparts. This makes them much more appealing to investors and banks since you are dealing with a reasonable amount of investment.
The appeal for bridge loans in the commercial industry is quite strong due to the positive effects they have. In this area of real estate, companies that are in a dire financial situation utilize bridge loans to temporarily carry them. This gives the company the additional time needed until an investor can be located so they may keep their doors open and continue business as usual. Without the convenience of these loans, they would likely go under.
Sometimes a commercial property is about to go under and offers to sell at a greatly reduced rate if a buyer can make an immediate offer to save them. This keeps creditors at bay, saves increased harm to their credit and helps to limit the damage that can be made to their credibility with others. A bridge loan in this situation would give them a quick buyout before their lender could require that the company's assets be liquid in order to satisfy the debt.
Bridge loans are also used when companies are in the mid of private financing, or if a company is offering to go public. Since this time can be quite significant for the process to be completed, bridge loans give the company the needed injection of cash to carry them through this period.
Another popular way to implement their use is during a project's permit phase. Since there is never a guarantee that a project will receive the necessary permits that is needs to carry on the work, a bridge loan may be inserted during this lull in order to carry it until the official documentation has been obtained. Of course, as with any practice of lending the higher the risk, the higher the fees involved.