What Is a Bridge Loan?

A bridge loan is a short-term financing tool for any kind of multifamily or commercial real estate. This type of financing generally has a short term — between a couple months and a couple years. While these loans have higher costs than traditional, permanent financing, the primary advantage to using a bridge loan is its speed of execution.

If you need financing during the acquisition, rehabilitation, lease-up, or repositioning of a property, bridge financing may be exactly what you need.

Read on to learn more about bridge loans in the context of commercial and multifamily real estate.

Bridge Loans in Multifamily Real Estate

In the multifamily real estate sector, bridge loans have many uses. Some of the most common reasons for taking a bridge loan include:

• Purchasing an apartment building
• Refinancing construction debt during a property's lease-up phase
• Financing renovations or other major capital improvements at a property

Bridge-to-HUD Financing

Another notable way to use a bridge loans is to cover the period when you're waiting for long-term, competitive HUD financing. While HUD multifamily loans offer the best rates, longest fully amortizing terms, and highest leverage in the market, they can take a very long time to originate. Bridge loans can fill that important gap from the time you've applied for your long-term financing to the time it closes in the form of a bridge-to-HUD loan.

Bridge Loans in Commercial Real Estate

Our proprietary platform can connect you with commercial bridge financing for any one of a number of reasons.

If you are buying an office building that has significant vacancy, you may not find great financing terms until the asset has a stabilized tenant base. Because of this, a bridge loan can buy you time to improve your property's economic situation. This goes for any type of commercial property, from industrial to retail. Bridge loans can work in a similar way for recently developed properties that don't yet have a full tenant roster.

Bridge financing can also be valuable when renovating your building or making sweeping upgrades. They can give you access to capital, which you can then use to boost your property's value — which in turn will let you access far better, longer-term financing when the time comes.

Another common use of a commercial bridge loan is to execute a purchase quickly. Bridge loans close much faster than most types of financing, and this can be a great way to acquire an asset without having to negotiate a lengthy timeline due to the requirements of getting permanent financing right away.

Advantages of Bridge Loans

This section explores each of the many advantages of using bridge loans for commercial or multifamily properties.

Fast Funding

Bridge loans are among the fastest-closing financing packages available to commercial real estate borrowers. A loan can close in a matter of days, which can enable an investor to execute her or his real estate strategy quickly and effectively.

Flexibility

Bridge financing is also very flexible, both in its purposes (described above) and its loan terms. The length of the loan, monthly repayments, interest rates, and many other aspects are all open to negotiation with many lenders.

Prepayment Is Simple

Generally, bridge loans do not have prepayment penalties attached. This adds to their flexibility. If you are able to obtain longer-term, permanent financing earlier than expected, this means you can repay your bridge loan immediately at no cost beyond the loan's balance.

Interest-Only Payments

Bridge loans, similar to most construction loans, allow for interest-only payments over the life of the loan. While this won't enable you to make headway paying down the principal of your financing, it can keep financing costs lower and cash flow stronger.

Disadvantages of Bridge Loans

Naturally, bridge financing for commercial or multifamily properties typically has a number of disadvantages. We explore these below.

Higher Costs

Bridge loans have higher interest rates — often significantly higher than rates on longer-term financing. This means that monthly payments could get costly, even despite being interest only. Beyond that, bridge financing also may have fees of up to 2% of the loan amount. This isn't too out of the ordinary for a commercial mortgage, and this fee can often be negotiated.

Loans Need to Be Refinanced Quickly

This ties back to the point about costs, but with an additional consideration. Loan terms are rarely longer than two or three years and generally cannot be extended much if at all. This means you need to have a refinancing package — or the sale of the property — lined up well before the loan matures. Otherwise, you will need to pay a massive balloon payment.