Bridge Loan Financing

What are bridge loans used for?

Say there is a well-located retail property with very high vacancy and below market rents because the property has been mismanaged by owners who don’t get along or don’t have the money to bring in quality tenants. A bridge loan would give a new buyer the funds to acquire, renovate, and re-tenant the property without the same debt coverage constraints of a traditional lender.  Perhaps there is an opportunity to change the use of a property from a low rent/sf industrial facility to a much higher rent/sf self-storage facility.  A bridge lender can provide the borrower with the capital to convert the existing structure to the new use and see the business plan through. These bridge loans are provided by banks, debt funds, private lenders, and more recently, life insurance companies.

How active are life companies in the bridge loan lending market?

A handful of life companies have started to step into the bridge loan market as they see the opportunity to achieve better yields with shorter-term, higher-priced bridge money. Bridge loans also give them the opportunity to refinance the property once it’s stabilized with a permanent fixed-rate loan. They offer competitive pricing with banks, debt funds, and other typical bridge lenders.
 
Typical transactions have three-year terms with two one-year extension options that are priced at a spread over 1-month LIBOR. Loans can be sized to 75% +/- of the overall cost of the project and are typically able to be paid off earlier than the three-year term should the business plan be executed faster than expected. Loan requests can be entertained in amounts as low as $5 million.

In addition, some life insurance companies can offer participating loans at up to 90% loan to project cost in which the life company will participate in the value created by the borrower. In many cases, the amount in which they participate in the upside is cheaper to the borrower than traditional equity sources.

Whether the bridge loan is made with a life company or another source, it is important that the borrower be experienced, well-capitalized, and have a clear business plan as to how they’re going to execute their strategy to bring the property from point A to point B.

What is an example bridge loan that you’ve completed recently with a life insurance company?

PSRS just closed a loan for the acquisition and re-position of a portfolio of student housing properties in the Southwest.  The properties were well-located within the market but had under-market rents and a poor configuration. Through cosmetic changes to the property, relocation of the leasing office for more visibility, and a re-branding, the borrower would be able to increase their rents to market levels.  To execute their business plan, they were provided with a loan of 75% of their approximately $18 million cost at a very competitive spread over LIBOR. Based on the timing of the leasing cycle in the student housing market and their expectations for the completion of the renovations, they’ll be able to execute their business plan in about a year and a half and exit the bridge loan either through a refinance or a sale.

Do bridge loans receive the same servicing from PSRS as other loans?

One of the biggest selling points of working with a correspondent lender is that the borrower can pick up the phone and call the mortgage banker and their servicing department directly to handle any questions or issues during the term of their loan.  In bridge transactions, where there are a lot of moving parts and sometimes a pivot in the business plan, borrowers can rely on PSRS to be their first call and help them navigate through the process. Other bridge lenders may sell off their loans to unrelated parties and/or engage 3rd party services which makes connecting with a decision maker for help very time-consuming and frustrating for the borrower. This is why borrowers are provided with remarkable value in working with a correspondent to a life insurance company.