While residential mortgages are often 30 years in length, a typical commercial bridge loan may have a term of only a year or two. This can be a great benefit in many instances – as an example, you may want to secure a short-term loan right now so you can make property improvements before refinancing with a more permanent and lower-rate solution in a year or so.
The fact is that transitional financing solutions are vital in an industry where short timelines are the norm. The ability to move quickly on an opportunity while also setting a long-term strategy in motion is a major bonus for investors and business owners.
However, bridge loans do contain a few wrinkles that are not typically found in a more standard commercial mortgage transaction.
Since the timeframe of these loans is so much shorter, lenders need to know how a prospective borrower will ultimately take out the loan before they agree to fund it.
This is what’s known as an “exit strategy,” and it is a vital component of any commercial bridge loan.
You’ll need to be able to clearly communicate your long-term plan for the commercial property in question and present a well-defined business plan that inspires confidence with the lender.
But don’t worry! With some research and due diligence, you can establish an exit strategy and put yourself in a good position to get the loan you need.
Determining your exit strategy
You already know why you need a commercial bridge loan. The key is communicating that need clearly and with confidence.
Not sure where to start? Here are some of the most common reasons why borrowers require interim financing for their commercial properties.
Exit Strategy 1: Make necessary improvements and refinance at a lower rate
This is likely the most common exit strategy for commercial borrowers. Perhaps the prospective borrower is looking to make cosmetic improvements to their office to favorably adjust a lender’s valuation of the property. Or it could be that the borrower’s strip center needs more tenants before a traditional lender will agree to finance the property.
If both of these cases, one could secure a short-term, higher-cost bridge loan and then take it out with a long-term, lower-rate loan once the improvements have been made.
Exit Strategy 2. Sell, or “flip,” the property
Investors have long seen the opportunity in purchasing a distressed property, quickly rehabbing the building, and then re-selling it for a profit. Indeed, the success many investors have enjoyed, coupled with the popularity of numerous television shows based on the subject, have turned “fix and flip” investing into nothing less than a national phenomenon.
Lenders have varying levels of tolerance for fix and flip deals, but those who do fund these types of transactions need clear assurances from the investor that they are experienced and have a sound strategy that will be executed upon the bridge loan’s maturity.
A lender will want to know more detail about your exit strategy, but if you can align your goals with tried-and-true commercial bridge plans, you’ll be off to a great start.
Creating your business plan
Every business plan is unique because every business is unique. Still, you can follow a basic structure to keep yourself aligned with what will interest the typical lender. Consider including the following in your business plan:
- A renovation plan with estimated costs and a timeline to complete these improvements.
- A leasing plan that includes projected rents and a timeline for when the property achieves stabilization. The leasing plan should be based on market rents.
- A short bio describing your experience in property renovation.
- A defined exit strategy for how you intend to pay off the bridge loan.
If you’re planning to request a commercial bridge loan, taking these preliminary steps will help you create a strong first impression with the lenders you engage.
Already have a strategy in mind? Then learn more about Commercial Direct’s Bridge Program here (Commercial Direct is a division of Silver Hill Funding, LLC.). When you partner with our commercial mortgage experts, you can secure a short-term mortgage solution that is customized to meet your specific needs.