Commercial real estate bridge lending has surged in 2017 as conventional lenders tighten their qualification standards, and the already crowded commercial real estate investor market becomes even more competitive. The need for creative lending on quality deals has led to the creation of several new debt funds, as well as expansions of existing bank and agency programs. There has been no shortage of bridge financing providers with yields on these notes far surpassing what a bank could achieve on their conventional programs, or what an investor could achieve placing his or her money in a different investment vehicle.
A bridge loan is a short-term financing solution offered by select lenders that provide funds when permanent loans cannot be approved. Typically, these are 12- to 36-month term commercial loans that are held on the lender’s balance sheet. Long-term financing from banks and other conventional commercial lenders is sometimes denied to investors due to a variety of potential qualification issues. Often this decision is made on the tail-end of escrow, leaving investors with limited options and an approaching deadline. There is usually too short of a timeframe to start the loan application process again from scratch with another conventional lender. Bridge loan programs offer much faster processing and decision-making, and provide a viable solution to escrow timing issues. Other times, the investor knows and understands the problem upfront and needs some lender leniency to get him from point A to point B. Common hurdles here include cash flow qualification or deferred maintenance and rehabilitation issues on the property side, or credit and financial issues on the borrower’s side. Repositioning of an asset has also become a common scenario that fits in the bridge lending box.
In our current stage of the commercial real estate cycle, most conventional lenders, including banks, life insurance companies and CMBS providers, have started to tighten their minimum requirements and capping what they are willing to provide. Banks especially are still hamstrung by red tape and sometimes lack the ability to satisfy regulators. This situation has created a need for more aggressive financing that can lend outside of the box and consider a viable exit strategy in the decision making. Bridge providers entering into this space are also positioning themselves years in advance for the anticipated downswing. As commercial values stabilize and loans come due, debt is going to be much more difficult to source in the next five to 10 years at expected higher loan-to-values. Maturing CMBS loans have also contributed to the increase in need to refinance debt with quick and certain execution to avoid default. The expedited timeframes to close these loans are not usually available for CMBS providers and other traditional lenders.
Competition and market conditions have also played a part in the expansion of new bridge lenders. With the rise of e-commerce and the need to be “Amazon-proof” in the retail sector, opportunities have arisen for bridge providers. Increased vacancies at retail properties have become a common issue, especially for owners that have debt coming due. Conventional financing many times cannot be achieved for these owners due to the hit taken on property cash flow. Additionally, big-box retail vacancies and opportunities for repositioning have also fueled the capital need in order to get through the interim and also secure improvement funds for these projects. These commercial repositionings are satisfying growing demand for evolving space needs, including the continuing rise of food halls, self-storage facilities and experience-based retailers.
The struggling retail sector has also forced many tenants to consolidate and regroup on marketing and business strategy to remain competitive. Many times, this includes strategic relocation selection. This in turn has caused owners to seek interim financing to fund attractive tenant improvements and exterior upgrades at quality properties. On the multifamily side, the same could be said for apartment owners as the demanding millennial generation raises the standard for apartment owners and their communities. The heavy construction of high-end apartments has been putting pressure on owners to add amenities and spruce up their older properties in recent years.
While many banks and agency lenders are coming into the bridge space in one form or another in order to reel in the deal and condition it for an internal take out loan, these programs are still under regulations and qualification. Speed can also still be an issue. The specialized, non-bank debt funds typically remain the more strategic and popular option among investors. Each of these lenders are distinguishing themselves and winning deals by offering various specializations. Partnering with the appropriate situational lender for any particular project can be paramount to the execution and success of the property.
Colin Dubel is a commercial mortgage advisor and principal of HarborWest Commercial Lending, based in Orange County, Calif. He can be reached at [email protected].