Escape the Lending Gap with Bridge Loans
By Don Pelgrim, chief executive officer, Wilshire Finance Partners; and Brian Murphy, senior vice president of sales, Wilshire Finance Partners.
Many people, including new commercial mortgage professionals, misunderstand the purpose of a bridge loan. Understanding and utilizing bridge loans, however, is important because they can be effective tools for savvy originators and borrowers to bridge the gap to permanent financing.
One way to think about a bridge loan is to consider its cousin in concept — the bridge bank. When a bank fails, the Federal Deposit Insurance Corp. (FDIC) is authorized under federal law to establish a bridge bank, which is a temporary national bank chartered by the Office of the Comptroller of the Currency and organized by the FDIC to take over and maintain the banking services of the failed bank.
A bridge bank is designed to bridge the gap between the failure of the bank and the time it takes for the FDIC to implement a satisfactory acquisition by a third party.
Bridge banks are an important part of the FDIC’s bank resolution process for large or complex failing bank situations. They afford the FDIC the time it needs to take control of a failed bank’s business, stabilize the situation, effectively market the bank’s franchise and determine an appropriate resolution.
As a result, a bridge bank provides a logical, thoughtful, and prudent alternative approach to resolving a complex and difficult situation — a bank failure.
Just as a bridge bank provides a temporary solution to a problem until a permanent one is found, a bridge loan is a short-term loan designed to bridge the gap in timing and financing borrowers.
As the credit markets have become less constrained, borrowers and investors are finding that traditional financing is becoming easier to get. Borrowers still plagued with credit and capacity issues that came about because of the downturn may run into obstacles, however.
Although financing is not as difficult to secure now as it had been during the recent downturn, several factors may create roadblocks an investor needs to maneuver around. These include increased regulation and oversight in the banking sector, challenges facing government-sponsored agencies and private-label securitizations that have not fully rebounded.
In these situations, bridge loans and bridge lenders may help ease the transition for properties and borrowers.
Not a bailout
Although bridge loans can help borrowers secure financing with less-than-perfect credit and diminished capacity, mortgage professionals should not confuse a bridge loan with a bailout loan.
Many savvy investors, even those with excellent credit and a healthy capacity to borrow, often use bridge loans to take advantage of opportunities to purchase distressed or mismanaged assets, and to convert those assets into healthy, performing investments.
Used effectively, a bridge loan is a financial tool. It can be used in a two-step process to permit a borrower to capture and exploit the market opportunity, and get traditional financing when the borrower’s issues are resolved and the obstacles to obtaining permanent financing are cleared.
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After they understand the structure and take-out strategy of their investments, many well-informed mortgage professionals and borrowers have come to appreciate the value associated with bridge loans. The combination of readily available capital, speed and flexibility provides these borrowers with an edge in the competitive commercial real estate market.
In contrast, short-sighted borrowers focus solely on the current cost of the financing rather than the overall return from the real estate investment, or worse yet, fail to consider the real costs of the project — market research, time, effort, opportunity and sweat equity — of replacing a lost investment opportunity because financing was unavailable.
Don Pelgrim is chief executive officer and Brian Murphy is senior vice president of sales for Wilshire Finance Partners, a Los Angeles-based portfolio lender specializing in providing bridge loans to real estate investors. Reach Donald Pelgrim at email@example.com and Brian Murphy at firstname.lastname@example.org, or call (310) 736-1370.