You've found the perfect investment apartment building: an established property in a prime location that just needs a face-lift to justify a rent increase. Financing the purchase and improvements may be easier than you think with a bridge loan. Just like it sounds, this type of loan provides a “bridge" of short-term financing from six months up to three years to cover costs before a sale or refinancing into a long-term loan.
In 2018, Greystone provided about $1 billion in bridge financing, double the amount of bridge loans approved the year before, says Anthony Alicea, head of production for its Portfolio Lending Group.
How Investors Can Use Bridge Loans
The two primary drivers for bridge loans are timing issues and value-add propositions, says Alicea.
“The most common scenario for a bridge loan is when someone acquires a multifamily property and wants to renovate, such as replacing kitchen cabinets and outdated appliances," says Alicea. “The owners want to spend $5,000 to $10,000 per unit for improvements and to upgrade the landscaping and clubhouse. Typically, these are buildings that are 90 percent or more occupied, which means those unit improvements need to be done a few at a time."
A bridge loan finances the acquisition and capital improvements, which eventually allow the owners to raise the rents and create more value. After the owners partially or fully complete the renovation, they can usually refinance the property with more long-term financing.
Another common use for a bridge loan is to help facilitate financing with a loan insured by the U.S. Department of Housing and Urban Development (HUD).
“Greystone is the largest lender by volume and number of transactions in HUD financing for multifamily and healthcare combined, so we have deep experience with these loans," Alicea says. "Even so, it's typically a four- to six-month process from loan application to funding with HUD financing. Very few sellers are willing to wait that long, so we can close the bridge loan for the purchase, while simultaneously underwriting for the HUD loan application process."
Similarly, investors can use bridge loans to acquire property that they plan to recapitalize with Low-Income Housing Tax Credit (LIHTC) syndication, a process that can take about a year to complete, according to Alicea.
For investors that already own a stabilized property but aren't sure whether to sell it or refinance, Greystone offers commercial bridge loans options while they evaluate the market.
“If you're thinking there's a possible way to boost the rent next year, we can do a short-term first mortgage bridge loan up to 90 percent loan-to-cost," Alicea says.
Bridge Loan Guidelines
Bridge loan approvals require similar credit profiles to other commercial loans, but also typically include underwriting for longer-term financing. For a project that calls for increasing rents by $300 per month after spending $5,000 per unit on improvements, for example, underwriters will determine if the market can support that rise in rent.
“Our mission is to look at permanent financing down the road, so we want you to qualify for your exit financing when you qualify for your bridge loan," he says. “We like owners to have at least 10 to 20 percent equity in their deal, and we want to look at net operating income (NOI) today and in two to three years. We need to understand your business plan to add value, too."
Bridge loans are typically adjustable rate mortgages with interest-only payments. Greystone has a six-month lockout, which means that investors are only required to pay six months of interest even if they pay off the loan early, says Alicea. Greystone charges a 1 percent to 2 percent exit fee when the loan is paid off, but typically waives the fee if it supplies the permanent financing.
“One-stop shopping for your bridge loan and permanent loan is easier and gives you the assurance of your long-term financing," Alicea says. “For instance, if we know you're using permanent HUD financing down the road, then we can underwrite your deal based on HUD requirements from the beginning."
“Bridge loans could really be considered for any acquisition or refinance, since they offer higher leverage than permanent loans and give an investor time to create value in the long run," Alicea adds.