Understanding Bridge Financing

Bridging the financial gap when other credit options are scarce.

A bridge loan is a financial tool used by multifamily and commercial property owners to “bridge the gap” between the moment they get the loan and the moment they can do what they want to do with the property. Multifamily and commercial real estate bridge loan terms can fall between 3 months and 3 years, with most landing in the 12 – 24 month range. The apparent vagueness in this definition is on purpose since a bridge loan can be used for a plethora of scenarios and reasons.

The most common use of a bridge loan is to quickly purchase a property when there is no all-cash option. The most notable advantage to bridge loans is that they often close much more quickly than traditional financing and are based more on the value of the property than anything else. Most other loan products are often heavily based on the income a property generates, prospectives, and heavy analysis. Because bridge loans lack this necessity of analysis, they can close much faster, and with less stress. The trade-off, however, is that interest rates on bridge loans can sometimes be triple or quadruple the market rates for conventional financing.

Another use of a bridge loan that is popular among investors of multifamily or other commercial properties would be for substantial rehabilitation and stabilization prior to getting conventional multifamily financing. Funds from the bridge loan would be used to keep the property financed while finishing up the necessary upgrades and then likely leasing up the property. This can apply to most property types such as multifamily, retail, office, etc.

In general, bridge loans are usually for out-of-the-box, one-off type situations. Each borrower may have very unique circumstances, but bridge loan requirements remain pretty consistent at around 65% of the property value and a payoff date usually in less than three years.