How a Commercial Real Estate Bridge Loan Works?

Unlike permanent financing, where loans are funded based on the loan-to-value (LTV) ratio, commercial bridge loans are often based on the loan-to-cost (LTC) ratio or after-repair value (ARV). Lenders will consider a property’s current condition, renovation plans, and market conditions before approving or rejecting a project.

Because these loans are based on a property’s future value, they carry more risk to the lender than permanent financing. Pricing will be determined based on the level of risk involved, with higher-risk projects carrying a higher interest rate. Because conditions can vary widely with commercial bridge loans, terms will also vary considerably based on the factors listed above.

A commercial bridge loan can allow a borrower to purchase a commercial property at a steep discount due to the property’s poor condition or the market conditions surrounding the property.

Lenders will assign a TC for the renovated property, including the purchase price and the cost of the needed improvements. This will likely be the limit to which the customer can borrow. In most cases, the borrower will be limited to 80% of the LTC value for the commercial bridge loan.

The renovated property can then be sold for a higher value, allowing the borrower to pay off the bridge loan and make a profit on the project.

There are other ways to use a commercial bridge loan:

• When a borrower cannot qualify for permanent financing. The temporary financing can be used to resolve credit issues that allow the borrower to eventually qualify for permanent financing at the end of the project.
• When a borrower has a limited time window for purchasing a property the ability to secure financing quickly. Permanent financing often requires the project to be finished before the loan is closed.
• When a borrower wishes to purchase and develop raw land, demolish existing structures and rebuild, or to purchase, renovate and sell existing properties.