Yes, the cost of money for a bridge loan is higher than what is offered by a conventional lender. In a typical bridge loan transaction, borrowers will pay a premium for certainty of execution and speed; two things that traditional banks are not known for. Bloomfield Capital and other bridge lenders fill a very important niche roll within the commercial real estate industry by providing capital that conventional lenders are simply not able to fill in a timely fashion.
Focus on more than just the interest rate, look at term and points. With respect to points, the borrower needs to find out the true cost of a bridge loan by adding up all the fees that are being charged. A higher interest rate may be quoted, but expedited due diligence reports and limited pre-payment can often make up for the higher initial cost of the capital. Bloomfield Capital’s typical loan scenarios include an interest rate range of 9%-11% for a maximum term of 18 months and 2%-6% points net funded. It’s important to remember that no two bridge lenders are exactly the same, and borrowers should fully vet out each potential lender they anticipate using. Though many claim to be direct capital sources, always verify sources of funds and recently closed deals with both borrowers and brokers that have recently transacted with the lender.
Provide the bridge lender with the story. Often times, the story is as important as the typical due diligence items such as tax returns, financial statements and credit scores. While conventional lenders typically have a “check the box” loan process, a bridge lender takes many things into consideration when underwriting a new transaction. Bloomfield Capital looks at the entire situation surrounding the asset, including cash flow, imputed equity, debt yield and LTV. Some borrowers are afflicted with low credit scores, a prior bankruptcy, or pending foreclosure, however with the right explanation, a bridge lender might consider the request. The right collateral might be able to help ameliorate any concerns with sponsor credit or liquidity.
Have an exit strategy. A sponsor should consider how much time he has to pay back the loan and plan accordingly. The ability to secure a real estate bridge loan often times depends on the exit strategy. Bridge loans are short-term, interest only, and often times have a balloon payment due at the end of the loan term. A sponsor should focus on the exit strategy because without a well-planned takeout strategy, bridge lenders may decide to pass on the opportunity to fund and focus on opportunities where they know sponsors have a takeout plan in place.
Private money can creatively help urgent deals close quickly, and by avoiding the mistakes outlined above, sponsors will be able to utilize bridge financing to close fast moving transactions that would have otherwise been missed.
