Bridge loans by their very nature or definition, are short term loans or mortgages that are required to meet some form of short term obligation and in many cases the payout of the bridge funds in the first step in a process to get to the exit strategy that will repay the funds.
So first and foremost, there is a certain amount of transaction risk that comes into the equation for lenders.
Because the transaction to be completed and the related process required to get to an exit strategy to repay the bridge, has actions that need to be completed by one or several people, the transaction risk can be considered to be significant, even when all the pieces are lined up.
The result with respect to the cost of capital is that there is higher risk premium attached to most bridge financing transactions as compared to a more conventional transaction.
In addition to transaction risk is market supply and demand factors.
There are significantly less lenders in the market that will do bridge financing as compared to more traditional financing.
The lenders that do partake in this market have the skill set and resources to facilitate these types of deals including managing the exit strategy that will return their money.
Because the supply side for these types of deals can be lower than the demand side, especially when you build in the regional focus of most private lenders, there is a premium attached to these types of deals.
Another characteristic of bridge lenders is that they need to be able to assess and fund quickly as most bridging lending scenarios have very short timelines to work with.
In many situations the reason for the bridge financing in the first place is because some other form of capital or specific event to a transaction did not materialize when it was supposed, facilitating the need for another source of capital with the time remaining to complete whatever the deal is.
So in order to get bridge financing in place, the lender not only has to do this type of lending, but be able to do it quickly, which further reduces the amount of supply in the market place.
Speed is also the reason why either residential or commercial property financing is a preferred form of bridging due to the speed in which a property can be evaluated and taken as security.
Add all these factors up and you end up with a higher cost of financing related to risk, supply, and speed.
Borrowers on the other hand will argue that if all the pieces in the process to repay the bridge are in place that there should not be a higher cost of financing attached to these loans.
But this argument only holds true if there are several lenders in the market that would go along with the logic, which there typically is not, so we are back to the issue of supply and demand.
Bottom line, bridge loans save a lot of deals and even though the cost of capital may be higher than what you’re used to paying, the total cost of financing for a bridge loan may be a mere fraction of what you out of pocket cost or opportunity cost is if the funds are not made available to your deal in the time you have to complete it.
If you require a bridge loan and have assets to leverage, I suggest that you give me a call so we can quickly assess your situation and provide financing options for your immediate consideration.
One of the real challenges with trying to purchase a commercial property is locating a lender that is interested at funding your deal at a given point in time.
This can be very challenging due to the wide variety of commercial properties in existence, the business status of any particular property, and the portfolio and interest of any given lender.
Let’s look at a couple of examples to further explain my point.
Properties that generate the most lender interest are going to be revenue producing properties that are generating substantially more cash flow than what would be required to service debt.
All commercial lenders are interested in cash flow, so on the surface, any bank or institutional lender could be interested in the deal.
But all lenders are also driven by the composition of their portfolio at any point in time. This can lead to situations where a deal completed by a bank last month could not be completed the following month if a similar deal was presented.
Unfortunately, the lender doesn’t necessarily tell you there is a pretty good chance of not being able to squeeze your deal into their portfolio and put you through the application process, potentially wasting time and money and putting your deal at risk.
One way to avoid running out of time is to get a slightly higher cost bridge loan to get the deal done and provide you with enough time to hunt the market for a preferred long term deal. Because cash flow is strong, this should not be hard to do and the added cost incurred is likely going to be small as compared to missing out on a good opportunity all together.
Now, lets look at the other extreme…properties that are not generating enough cash flow today to service debt.
These may be great buying opportunities in that the current owner does not have the means or ability to get the cash flow where it should be and has to sell out due to lack of capital to move forward, but what’s the right lender to take this deal to?
When we’re talking about less than optimal property acquisition, lenders tend to be much more selective in terms of the deals they want to take on. And once again, you can waste more time and money going through the application process for funders that do not have a high level of interest.
The ability to assess what a lender can or can’t finance and what they are currently interested in is very difficult to assess from the outside looking in.
Without following the market and being in regular contact with an active network its almost impossible to guess who to turn to.
This is where it can be very helpful dealing with a commercial mortgage broker who stays in tuned with the market and has a good sense as to where the most relevant sources are for any given deal at any particular point in time.
Being able to zero in on highly interest lenders quickly is going to be important for just about any application along with understanding roughly how your deal will be priced in order to make sure that any potential financing option you may be considering can align with your own cost of capital assumptions.
When we are talking about financing bare land or vacant land that is zoned commercial, there are a few things to keep in mind as the property owner.
First of all, is the land vacant with buildings that are not in use, or a clear and bare piece of property.
Second, are there services on the property or up to the property line? If there are no services adjacent to the property, where would they need to be accessed from and what would be the cost of getting them to the site?
Third, what has been the historical usage of the property over time and has there been any de-comissionings from past activities as well as environmental assessment reports?
Fourth, where is the property located. If a bare lot of commercial property is located within a major urban center, developed industrial or commercial park, this will have a considerable impact to lender interest than if its located in an undeveloped commercial park in a rural town.
All of these items speak to the potential resale market for the property which is going to be important for any lending consideration.
Vacant commercial land can be financed through a bank or institutional lender provided that all the above questions provide value added answers that reduce lender risk.
Further, a bank is going to want to see a source of debt repayment from an existing commercial cash flow in order to be able to fund this type of deal.
The weaker the overall profile, the more likely that this will become a private lender type of deal. And if debt servicing is cannot be demonstrated from existing cash flow, then prepaid interest may also be factored into the equation.
From a use of funds point of view, banks and institutional lenders are not big on equity take outs and prefer to see any loan amount invested into the property to further increase the security value.
Private lenders are less concerned about the use of funds if an equity take out for another project is required.
In terms of loan to value, whether we’re talking bank or private, the amount of financing you can expect to be able to secure on vacant commercial property is between 40% and 60% and 50% being the average.
Higher loan to value amounts would only likely be considered if the properly was on the verge of being developed or was sitting right on the edge of an active development area.
With respect to loan to value, because the land is vacant, it can be difficult to determine fair market value and in many cases a private lender will default back to what the land was purchased for as a base to lend from which can be considerably different from a newly completed appraisal.
Personal covenants can also be important as property lenders will want to get as much security as they can on any bare land lending scenario.
If you have a piece of vacant commercial property that you’d like to finance, I suggest that you give me a call so we can go over your situation together and discuss different options that may be available to you in the market place.
With the most recent mortgage rule changes coming into effect during July, there remains to be seen how all the provincially regulated credit unions will adjust to the new world of lower risk mortgage financing prescribed by the federal government.
First of all, credit unions are very well established and financially prudent lending organizations, so I don’t see any type of land rush so to speak to gain market share from banks and trust companies that fall under federal banking regulations.
But in certain situations and for certain borrowers with strong profiles, credit unions may be able to provide what the banks cannot.
For instance, banks are going to be providing HELOC’s or home equity lines of credit at a maximum of 65% loan to value down from 80%. While some credit unions will adjust to stay right in step with the main line lenders, there are still those that are offering HELOC’s from 65% to 80% loan to value.
Once again, not everyone may be able to qualify for this and its unclear if the opportunity to secure a higher HELOC through a credit union will continue, but for now it certainly can be an option for some that may gain credit unions some business and borrowers a higher borrowing amount at preferred rates.
The same may also be true for self employed individuals in terms of the manner in which they need to be able to support their earnings, and for still others that are looking to secure a variable rate or a term rate less than 5 years who have to use the 5 year fixed rate to qualify where some credit unions are still using the three year rate.
There is also a strong possibility that credit unions will soon be allowed to operate outside of their current provincial boundaries which could provide program offerings to you in the future that are not currently provided by credit unions in your area, assuming you even have regional or local credit union services available to you.
In the near term, as mortgage holders scramble a bit to get their home financing to fit into the newly minted mortgage regs, there is no doubt going to be more individuals checking out what their local credit union has to offer.
And in cases where strong borrowers are caught by mortgage rules that are inflexible, there may be some very strong options here to consider.
If you’re looking for a bank alternative for a specific financing requirement, I suggest that you give me a call and we’ll go through your situation together and discuss all the relevant options that may be available to you.