Bridging the Gap: The Short-Term Bridge Loan and One Lender's Perspective
When there is a gap of cash flow for a commercial real estate investor there is a real need for financing - and mortgage lenders are stepping in to fill that gap with short-term bridge loans. There is a benefit to the bridge loan for both borrower and lender. The borrower receives the needed funds in the interim, and what's in it for the lender? National Real Estate Investor published an interview with the president of Inland Mortgage Capital in which he explains the need his company fills and how the bridge loan will be around for the long term.
A short-term bridge loan typically has terms of six months to one year of duration, although some companies like Inland Mortgage Capital extend them longer, such as three years. Since they're a shorter term loan, they usually have a higher interest rate than their long-term loan counterparts. Bridge loans are utilized to float the real estate investor during a gap in cash flow, while the investor is completing a task toward creating value. This is often when investors will improve property, seek new tenants, or purchase other property.
Inland Mortgage Capital focuses their bridge loan program around the $3-12 million range and at a typical length of three years. The loans themselves have an 80% loan-to-stabilized value ratio for multifamily and a 75% loan-to-stabilized value ratio for retail, self-storage, office, and industrial properties. According to the NRE article, since launching their bridge loan program, Inland Mortgage Capital has already lent $160 million!
According to the president of IMC, Art Rendak, the loans themselves can be part of a borrower's business plan. They go towards value creation and at times can solve problems that the borrower knows only need a quick influx of funds to fix. Rendak also notes that IMC looks for the right project: they aren't doing full start-to-finish new construction, but rather what he calls “transitional assets” - meaning renovations, improvements, and other upgrades that can create value to the property. The borrower him/herself is just as important as finding the right project; and according to Rendak, experience is the key. While IMC will occasionally work with an inexperienced borrower, those situations are uncommon and unique.
The commercial real estate investor-turned-borrower can get a real bang for his/her buck with the short-term bridge loan in the small to mid-sized loan market IMC handles. By having immediate funds available for necessary renovations, repairs, purchases, etc, the borrower can successfully navigate a gap in cash flow. According to Rendak, although the loans are smaller for the lender, by spreading the risk over a multitude of deals/borrowers, it's a better situation for IMC. Other lenders also hunt for the deals with the bigger price tag, so IMC is in a better place with less competition by sticking with the small to mid-size niche market.
Rendak made the point that many lenders are more reticent to freely throw money around, and that there will be a continued need for a company like his to step in and fill a needed void. Even if current favorable regulations change and create a more aggressive lending environment, Rendak sees short-term bridge loans sticking around. When commercial real estate investors need funds for a cash flow gap, it certainly appears that companies like IMC will be there with a short-term loan to bridge that gap.