Liquidity is critical to commercial real estate (CRE) investing. Many investors consider it their lifeblood. Yet traditional financing is often too slow and ill-equipped to handle the fast-paced and constantly changing environment the market is known for. Maintaining liquidity while still pursuing the most lucrative deals points to one thing: bridge financing from a private lender.
Bridge loans from lenders like Salt Lake City, Utah’s Actium Lending allow investors to find a way through normally un-bankable circumstances. They allow investors to look at projects that conventional financing would otherwise force them to turn away from.
According to Actium Lending, here are the top five CRE investment scenarios for which bridge loans are essential – both in Utah and across the U.S.:
1. Value-Add Projects
A value-add project involves purchasing an underperforming property that struggles because of poor management, high vacancy, or even physical neglect. Conventional lenders typically require a debt service coverage ratio that simply cannot be met by the distressed property.
On the other hand, a bridge loan provides the necessary capital for acquisition. During the loan’s term, the investor can begin making the necessary upgrades or changes to stabilize the property. Once stable, the property can be refinanced with a conventional loan.
2. Time Sensitive Acquisitions
The next scenario plays out across Utah. It involves time-sensitive acquisitions in which multiple investors are competing for the same properties. They do not have time to wait for banks to complete their 60-90-day underwriting processes. They need to move quickly, given that the first investor to get to closing is almost always the winner.
Private lenders can typically move bridge lenders from application to funded escrow in under a week. For all intents and purposes, speed makes privately funded bridge loans as attractive as cash. While other investors are hanging around waiting for their banks, the investor with a private bridge loan can swoop in and take the property.
3. Addressing Maturing Debt
Because real estate cycles are really in sync with loan terms, an investor might find himself looking at a maturing permanent loan at a time when circumstances are not working in his favor. If he is not ready to take out a new long-term conventional loan, he can use a bridge loan for 12-24 months. A bridge loan can prevent default while also giving the investor time to look for a more attractive and permanent funding option.
4. Addressing Cash Flow Gaps
The amount of time between an old tenant moving out and a new one moving in is known in the industry as the ‘lease-up’ period. This is a critical time for owners of retail centers and office buildings. Why? Because spaces tend to be leased on a triple-net basis. Losing a triple-net tenant, even for a couple of months, can have devastating impacts on an investor’s cash flow.
A bridge loan can help an investor cover expenses, like property taxes and insurance, while he seeks a new tenant to take the space. And if he needs a little time for renovations and repairs, a bridge loan gives him that time.
5. Partnership Buyouts
The last scenario involves a partnership buyout. If one partner wants out of a deal and the other is willing to purchase his equity, a bridge loan provides the cash to get it done quickly. Ownership is stabilized without either partner having to suffer significant financial loss.
Actium Lending describes bridge loans as the ‘special forces’ of commercial real estate investing. They make it possible to do things that simply cannot be done in a conventional way.
