The old saying goes, “I have a bridge I’d like to sell you…” Well, references to bridge financing have nothing to do with bridges, but the expense associated with them can be pretty brutal if you aren’t careful. Let’s cover the basics of bridge loans.
What price would you pay for more time? This is the essential question that is asked with bridge financing. The financing is designed to give you anywhere from a couple months to a year of time, but you are going to pay a real premium for that time.
In a vast majority of cases, bridge loans are used in real estate transactions. The bridge loan typically becomes a need to “bridge” the sale of a previous property from which the proceeds will be used to fund a new property purchase. Let’s look at a classic example.
My business owns an office building. We have been growing like gangbusters and need a new office. We look around and find the perfect building. We need to sell our old office building to pay a chunk of money down on the new one. Since commercial real state takes time to sell, we need temporary financing. The answer is to use a bridge loan to buy our company 6 months or so by using the money to buy the new office building and wait for the old one to sell.
Qualifying for a bridge loan is a bit different than what one experiences with a normal loan. The loan is based almost only on the collateral offered. Since the loan is fairly short term, income projections and such don’t really figure into it. The issue is basically do you have collateral and can you afford the loan costs.
Loan costs. They are very high with a bridge loan. Since the loan is short term, you can expect the lender to crank up the cost because they need to make a profit. Does this mean the interest rate goes up? Yes, but only one percent or so. Where you really end up paying is in the points. A bridge loan may carry 5 to 10 to 15 points. Remember, a point represents one percent of the loan.
You can see why lenders would like these loans. They can make large profits on lending money for a very short term. If you need a bridge loan, prepare yourself for sticker shock and be ready to make a clear decision as to whether the cost makes sense.
Aazdak Alisimo writes about
commercial real estate loans for CommercialLoanStop.com.
