Is Your Bridge Loan a “Bridge to Nowhere”?

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Is Your Bridge Loan a “Bridge to Nowhere”? Powered By Docstoc
					Is Your Bridge Loan a “Bridge to Nowhere”?

                                                      Pronunciation: /brij/


                                                      1: a structure built to span obstacles for the
                                                      purpose of providing passage over the obstacle.

                                               The definition of a “bridge” connotes a number
                                               of challenges that need to be managed
successfully before the engineers & politicians can pop open the champagne to christen the
bridge a success.

What makes a bridge successful?

1)    Correct identification and evaluation of the nature of the “obstacles” the bridge is intended
to ease.

2)       Finding the right group to build the bridge on time and at reasonable cost.

3)       Making sure the bridge works, in that it takes you where you want to go, safe & sound.

The bridge analogy is great when the discussion switches to bridge loans. A successful bridge
loan conquers the same challenges as constructing a brick & mortar bridge over the Mississippi.
(I understand there are over 220 of them.)

First identify the financial obstacles, then determine the right loan structure, and finally make
certain the bridge loan takes you to where you need to go. A bridge loan without a sound exit
strategy is about as advantageous as the proverbial bridge to nowhere. Both inevitably lead to a
good soaking!

What is a bridge Loan?

Bridge loans are designed to provide temporary passage over a financial obstacle or rough spot.
Like the concrete bridge that serves a short distance of the entire journey, the bridge loan is
designed as a temporary financing strategy, in place only until permanent financing can be

     •    Duration for mortgage bridge loans typically range anywhere from 90 days up to 3 or 5 years
          which is considered short term for real property or mortgage loans.
     •    The monthly payments are usually calculated on an interest only basis with the principal balance
          coming due as a balloon payment at the end of term.
     •    Bridge loan rates are typically much higher than their corresponding conventional counterparts.
   •   Bridge loan financing typically refers to loans backed by real property or mortgages.
   •   Some, but not all in the industry use the term “bridge loans” and “bridge loan lenders”
       interchangeably with “hard money loans” and “hard money lenders”.

Who uses bridge loans?

Most types of loans can theoretically be “bridged” until more permanent financing is put into
place. Construction loans, commercial loans, rehab loans, mezzanine loans and residential loans
can all incorporate bridge features. The common denominator for the bridge loan is the
temporary nature of the loan.

Some examples:

Residential Bridge Loans: The home buyer commits to buy a new home but is unable to sell
his existing home before the closing date of his new home. The bridge loan is secured to the
buyer’s existing home and the funds are then used as a down payment on the move-up home.
When the existing home sells, hopefully within a few months, the bridge loan is retired with the
proceeds from the sale.

Commercial Bridge Loans: A commercial property buyer is offered a substantial discount on
the property’s sales price if he can close within 30 days. Conventional lenders require more
time to underwrite, process & fund so the buyer seeks a bridge loan to meet the closing deadline.

Construction Completion Loans: A builder runs into construction or project delay. Their 2
year construction loan is coming due and their current lender has either said “no” to an extension
or decided not to extend the loan past the original term. In this case, the builder seeks an interim
or construction completion loan.

Rehab Loans: The borrower is purchasing a property in sub par physical condition and intends
to rehabilitate the property and then elect to either resell it or find a tenant. After the borrower
“flips” the newly refurbished property, he pays back the loan from the sale proceeds. If the
borrower elects to keep the property and rent it out, he or she will seek out conventional

Are bridge loans hard to find? They can be. Most lenders offer bridge loans on a custom,
case by case basis. Many bridge loan lenders are private and have specific criteria and
restrictions with regard to the type and geographic location of the collateral property. All the
basic best practices of how to find a lender apply equally to bridge loan lenders: meet many,
choose carefully & commit once. The one thing the lenders will all have in common is their
willingness to underwrite a bridge loan increases proportionately with the feasibility & certainty
of your exit strategy.

How best to avoid the bridge loan to nowhere? Key to avoiding the “soaker” or the bridge
loan to nowhere is to have a strong exit strategy. The ability to articulate & demonstrate that
strong exit strategy to prospective lenders will help tremendously in finding, building and
ultimately choosing the right lender relationship and it will help get you the best possible deal.
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Description: Correct identification and evaluation of the nature of the “obstacles” the bridge is intended to ease.