In real estate, the term “commercial bridge loan” isn’t uncommon. It is a type of loan that allows you to get cash right away and pay for current debts. It is usually used by office owners who want to switch offices but need money on the spot to move from the old one.
As good of a deal as this type of loan sounds like, there are some issues that you do need to be aware of if you want to apply for one. We’re not saying that the commercial bridge loan is something you should avoid. Rather, it is something that you should properly study if you really want to get it and work with a well-known commercial mortgage broker like Clopton Capital.
With that, you can understand exactly what you’re getting into and how you should handle it. That said, we’re going to explain how this kind of loan works and some issues you need to be aware of.
Commercial Bridge Loan, and How Does it Work?
Before we talk about the issues regarding this type of short term loan, it’s important to first know how this kind of loan works. In a nutshell, it is just an interim type of loan if you need to purchase commercial real estate when you don’t have any cash on hand.
While this is the main reason why people apply for commercial bridge loans, other reasons would be that the borrower can’t get permanent financing and if the borrower doesn’t have a good credit score but still wants to buy a new commercial space. It’s also used for offices that need to be renovated in the event that permanent financing is not an option.
Issues Regarding Commercial Bridge Loans
Now that you know more about how this kind of loan works, the next thing that you should know about is the terms. As compared to regular loans or even residential bridge loans, the terms of a commercial bridge loan can be a bit riskier. That’s why you need to know everything there is to know about commercial bridge loans before you actually decide to take it.
Here are the things you need to take note of:
1. Loan Cap
The first thing you need to take note of is the loan cap. This loan cap limits the loan amount that you can get so that the lender won’t have so much exposure. This is also known as a loan to value ratio. This means that the loan amount that you get will be less than the actual value.
For example, if the value of the loan is somewhere at $500,000, you’ll most likely only get $400,000. This is usually standard for most commercial bridge loans wherein the loan to value ratio is just at 80%.
2. Interest Rates
Another thing you need to take into consideration is the interest rates for these kinds of loans. As a whole, the interest rates of residential bridge loans are rather high, so you can expect commercial bridge loans to be even higher. To be more specific, the interest rates of loans will reach somewhere between 9% to 11% depending on the lender. Of course, these are just typical interest rates. You may encounter lenders that have even higher rates than this range.
3. Loan Period
Aside from just the loan rates, you also need to make sure that you take note of the loan period. When we talk about the loan period, we’re talking about how long the lender is willing to stretch out the loan. Typically, these loans will reach 6 to 12 months, so you can expect to pay quite a hefty amount every month.
However, there are some lenders who tend to be a bit looser when it comes to the loan periods. But typically, 6 to 12 months is the average loan period.
4. Loan Amount
Loan amounts may vary per lender. Loan amounts may reach from $1 million to up to $20 million depending on the borrower. The borrower may lend less or even more than the said amounts we mentioned. The borrower usually has criteria that he or she followed when determining the loan amount.
Just like any other loan, there are fees that you need to take note of. Some of the fees of a commercial bridge loan include the origination fee (which is usually 2 to 6%), the title fee, the appraisal fee, and the escrow fee. Of course, you also need to take note of penalty fees for late payments.
We can say that it’s not that easy to get this kind of loan. First of all, lenders will usually take note of your debt coverage ratio, credit score, net worth, liquidity, and documentation. For the debt coverage ratio, you’ll need to be in a range of 1.10-1.25. As for credit score, they will usually look for a score of 650 and higher.
The net worth and liquidity, on the other hand, is a bit more subjective, but they do look at that. Lastly, lenders will also look at tax documents, income statements, and other financial documents of the borrower.
Lastly, we have the collaterals. For these types of loans, the usual collateral will be the previous mortgage lien. This does make sense since bridge loans are usually gotten when real estate is involved.
While it may seem like a really good idea to get a commercial bridge loan in times wherein you need cash for new commercial property, you need to make sure you know what you are applying for. Commercial bridge loans don’t come without their own set of risks. However, you need to make sure that you can take those risks before you apply otherwise you will get burned out by the loan.
So before you decide to apply for this kind of loan, do take note of some of the things that we’ve mentioned above so you’ll know exactly what to do. Once you do your homework, it will be a lot easier to go about with your loan.