One of the most significant challenges in commercial real estate is managing your cash flow. Moving from one property to the next can be difficult if you don’t have the cash in the bank to close on new deals while waiting for your current property to sell.
Let’s say you have an agreement to sell an existing apartment or storefront property you have developed to a real estate trust, a pension fund–basically an institutional investor. In addition, you want to purchase an owner-operated commercial building for the tax benefits. Now here’s the catch: you’ve already identified the property you want and you need to act before anyone else puts it under contract.
Unfortunately, the average bank or long term financing will take anywhere from three weeks (21 days) to a month and a half (45 days) to close. In many situations, particularly when talking about commercial real estate, you don’t have the luxury of waiting that long.
Enter the commercial bridge loan.
Typically, these loans are short-term (one year or less) and come with higher rates than conventional loans. Most often, you’ll be paying only the interest during the term of the loan,with a balloon payment at the end to cover the remaining balance.
As a borrower, bridge loans can be quite risky if you don’t know what to expect. However, in many situations, this kind of financing may be the best option.
Our opening example is a traditional use of a bridge loan–it bridges the gap between long term financing agreements. Essentially, this bridge loan allows you to move on with your investment while the slow process of long-term financing moves along. Let’s look at some other circumstances where you might need a commercial bridge loan for your real estate business.
If you’re in an up-and-coming market, you can’t take your time when making an offer. The competition can be fierce in high-demand cities, meaning that a delay of just a few days could be the difference between getting a property or losing it altogether. A bridge loan can help you finance your next project much faster than waiting for a bank.
One of the best things to do is to look at the average closing time for properties in your market.If it’s less than a couple of weeks, fast financing is the only way that you can stay competitive.
Unique Buildings or Prime Locations
As a real estate entrepreneur, part of your due diligence is planning for profitability–understanding what makes a prime location that allows premium rents and sought after office space, storefronts or whatever category you are in. If one renter leaves, you want the shortest turnaround time to new tenants as possible, even if your rental rates are the same as another building. As they say, time is money. When you’ve done the work and identified the right building, you don’t want to miss.
What about the interest payments on a bridge loan?
It’s true that when you utilize a bridge loan you are going to pay more in interest. The loan is a holding pattern to gain access to the property and can be considered part of the “cost of doing business” in hot markets. An important consideration is your tolerance for risk and your cost of acquisition in your overall business plan.
Call Our Team Today
When searching for a bridge loan, you need a commercial loan broker on your side. Our brokers work across a range of business financing options giving us the breadth to advise you on options, including getting you the hard money you need quickly so that you can close and keep your commercial property business moving forward. Contact us today to learn more about your options in the commercial real estate business.