How to Help Your Client Create a Bridge Loan Exit Strategy

Educating prospective borrowers is an integral facet of any commercial mortgage broker’s job. Business owners and investors rely on brokers to provide expertise and identify the challenges and opportunities they may encounter while securing a loan.

But brokers who take on commercial bridge loans bear additional responsibility when it comes to client education. This is because bridge loans involve several wrinkles that are not typically found in a typical commercial mortgage transaction.

Take the concept of the “exit strategy.” Lenders understand that borrowers who are interested in a bridge loan are looking to eventually take the loan out with a more conventional solution once they are able to do so.

While residential mortgages are often 30 years in length, a typical bridge loan may have a term of only a year or two. Since the timeframe is so much shorter, lenders need to know how a prospective borrower will take out the loan before they agree to fund it.

It falls on the mortgage broker to clearly explain this to their clients before they begin shopping for the best lending option. They then need to be able to communicate the strategy clearly and have a well-defined business plan that inspires confidence when dealing with their lender contacts.

The business plan should include the following:

  • 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 bio on each sponsor with their experience in the renovation of properties.
  • A defined exit strategy for how the borrower intends to pay off the bridge loan.

Here are a few of the most common borrower exit strategies for commercial bridge loans.

1. Make necessary improvements and refinance at a lower rate

This is likely the most common exit strategy for commercial borrowers. It’s also the reason many of them are in need a bridge loan in the first place.

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.

In these cases, the borrower could secure a short-term, higher-cost bridge loan and then take it out once the improvements have been made.

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.

Mortgage brokers who wish to close commercial bridge loans can get ahead of the game by understanding the ins and outs of these exit strategies and instructing their clients on how they can successfully secure financing.

Brokers should also keep this in mind: If they provide strong value at this early stage, they can expect their bridge clients to give them more business when it comes time to take out the loan with a more permanent solution.

Silver Hill Funding’s Bridge Loan Solutions

Looking for a non-bank lending solution for your commercial bridge scenario?  Silver Hill Funding’s Bridge Program offers the flexibility and speed borrowers need for their transitional real estate assets.  Visit our Bridge Loan Program page to learn more.