— By Sunny Sajnani
Bridge loans in the commercial real estate space are typically defined as short-term credit facilities used for the purpose of financing the acquisition (or refinance) of an existing property with a specific, value-add business plan in order to reach stabilization.
During the past few years, there has been an abundance of new capital providers entering into the bridge lending space especially from private debt funds. With the arrival of this new cast of characters lending on transitional assets, a Sponsor needs to be very thoughtful on their choice of capital provider.
Since MCA has closed dozens of bridge loans during the past twenty-four months, here are some major considerations when comparing options and providers:
- Type of Lender: The profile of Bridge Lenders can range from a bank, debt fund, hedge fund, insurance company, private equity, etc. Each type of lender has different advantages and disadvantages to consider based on the business plan and profile of borrower.
- Loan Terms: With the capital markets bursting with bridge lenders (both established and new platforms), the variety of loan terms can vary significantly (i.e. recourse, leverage, pricing, fees, amortization, term, prepay). The debt funds have been the most aggressive in the market as it relates to leverage and non-recourse options. The banks have been the most aggressive on pricing and prepayment flexibility.
- Source of Capital: It is important to make sure your lender is reputable and has full discretion on its capital that it’s lending. MCA recently was involved in a transaction that had a rocky execution because the lender we thought was making the loan, planned to sell a “participation” in the loan to another lender that showed up at closing! We were able to rebound nicely from the surprise, but it’s important to make sure a lender can fund the loan they are quoting without contingencies.
- Flexibility: With most transitional deals, there will most likely be changes to the business plan along the path to stabilization. For that reason, you need a lender that will be your advocate to approve changes that are beneficial to the project. Some of the bridge lenders in the market, securitize a portion of their loans making changes and amendments to the loan documents very difficult. There are many examples to demonstrate. Sometimes leverage, pricing and/or both should be sacrificed in the name of flexibility to execute the business plan.
Whenever there is a large audience of lenders for any specific deal, it’s always beneficial to engage an intermediary to sift through all the economic pros/cons as well as the non-economic qualities of each option.
For further information on your best bridge loan option or to discuss the specifics of your transaction reach out to Sunny Sajnani at firstname.lastname@example.org.
The author, Sunny Sajnani, is a Principal & Director in the Dallas office of Metropolitan Capital Advisors.