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Bridge Financing 101

Real estate investors, companies, and other entities seek bridge financing to stem a short-term cash shortfall without which it would be impossible to proceed with an investment goal.

A homeowner might obtain a bridge loan to purchase a property with a closing date too soon for a traditional lender to perform due diligence on the loan documents. A company might receive an equity investment from a venture capital firm in order to see them through their startup phase. A commercial real estate investor who wants to capitalize on improvements to their property might secure bridge financing in order to pay for renovations before securing a refinance.

Bridge financing is an interim solution made with the expectation that long-term financing or financial solvency is on the way. Not all bridge financing is created equal, however. Here are the more common forms this stop-gap measure takes.

Bridge Loans (Debt Bridge Financing)

Bridge loans are short-term loans used in several real estate markets. They are processed in much the same way as ordinary mortgage loans and have similar expenses.

The main difference lies in the loan structure. Bridge loans have higher interest rates than permanent loans, typically LIBOR plus 3%-4%. Because they are intended for the short term, the loan term is only six months, though some lenders are willing to extend this term longer for a fee equaling one or two “points.” There are no prepayment fees.

Opportunity Funds and Hard Money Loans

Conventional lenders offer bridge loan to investors with straightforward purchases. If the purchase is particularly complex, requiring special expertise to process, you may need to apply for a bridge loan using an opportunity fund, or a special fund comprised of assets pooled from various investors, usually pension plans, endowment trusts, and private equity sources.

Another option is a hard money loan. These are bridge loans offered by private lenders based on the collateral value of the property rather than on credit rating. They are a good option for investors who don’t want to spend time dealing with the red tape a traditional lender makes you go through and who are sure that they can repay the loan amount quickly.

The downside of hard money loans is the interest rate and closing costs are much higher than those offered by traditional lenders.

Equity Bridge Financing

For investors who don’t want to go into debt on a short-term, high interest loan, bridge financing is available through venture capital firms. Instead of charging interest, the venture capital firm takes a percentage of the company in exchange for providing enough cash to see it through until the company is able to raise more equity financing. A typical scenario might be that the company agrees to let the firm have a 10 percent stake in exchange for six months of financing.

Investors may also choose to work together in a joint venture capacity, where one party provides the capital up front and the other party provides expertise or reputation. Unlike the equity provided through a venture capital firm, the bridge financing in a joint venture is shared between the parties, both of whom assume the risks and rewards.

Peak Finance Company, Commercial

Peak Financial Company, Commercial provides access to conventional debt financing, joint venture equity, mezzanine and bridge financing, and structured debt. They are consistently able to secure the best terms available, whether through Wall Street investment banks, pension and opportunity funds, commercial banks, insurance companies, or private equity investors.