Bridge loans in Colorado are becoming increasingly popular as the financing option for properties that would previously be considered impossible to fund. Bridge loans have both pros and cons, which borrowers should make themselves aware of before deciding to pursue this avenue of financing.

What is a Bridge Loan?

This is a form of temporary financing that helps you transform an unsuccessful property into a successful one. They are useful if you have a commercial property that needs substantial rehabilitation or that has cash flow but low occupancy and may not provide the debt service coverage requirements that banks and other traditional lenders require. They are generally issued to real estate investors with experience repositioning properties, who are in need of the capital to do so. They can also help give you extra cash if you bought the property with cash only; however, they may not be available to bailout troubled borrowers as most bridge loan lenders look for borrowers with their credit and finances in good standing.

Because of the high risk inherent in repositioning commercial assets, private lenders prefer to underwrite bridge loans for borrowers with experience in the market. If you don’t have the necessary experience yourself, finding a partner or advisor who does can help you convince your lender that you understand the risks.

Bridge Loan Lenders

There are a variety of lenders who are willing to make bridge loans from private lenders to banks.  Life companies typically are required to lock in interest rates over a longer period and are not as likely to want to fund short-term loans. Private lenders (including hard money lenders like Montegra in Denver, Colorado) have the most flexibility since they use private funds and don’t have to meet strict government requirements. They are also able to close loans much faster, often in days rather than weeks.

Bridge Loan Terms

These loans generally last for only one to three years.  If the borrower has taken a bridge loan from a private capital lender with the expectation that they will refinance with a traditional, long-term loan as their exit strategy. Typically, a bridge loan from a hard money lender will have an origination fee of between 1% to 3% and possibly a one percent exit fee. You usually have two payment options: to make interest-only payments during the loan term or include these payments in the loan amount as an interest reserve. This second option keeps you from having to make out-of-pocket payments until the property has a steady cash flow coming in.

Bridge Loan Value

Your bridge lender may use one of three methods to determine the value they are willing to loan on:

1. Stabilized Loan to Value (the appraised value at stabilization)
2. Loan to Cost (the total project cost including purchase price, interest reserve, rehabilitation costs, and closing fees)
3. As-is Loan to Value (the value of the property before any rehabilitation)

Most lenders will choose the lesser of the first two methods, but some will further restrict the loan amount by using the third one. It is important to find out which method your lender uses before you get to closing.

Bridge Loan Application

When applying for a bridge loan in Denver, the most important question that you will need to answer is the following: how will you succeed in making this property more profitable than it was before? To do this, you will need to explain any improvements you plan to make and a prospective schedule for their completion. If your property needs new tenants, then you must explain how you will do this and provide information like the property management company, new leases, and vacancy and absorption rates (for your property and the overall market). The more specific you can be, the more likely that you will convince your lender that you can execute your plan successfully. As with other asset-secured loans, a successful private money bridge loan application relies heavily on the character of you, the borrower, as well as your finances and resume.

Bridge loans have been increasingly popular in recent years and are expected to continue to be so in the near future, with competition driving rates down and making terms more favorable for borrowers. When interest rates do eventually go up, it is likely that the need for bridge financing will decrease again but, for now, they remain one of the best options for financing investments in problem properties.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.