IllinoisFinance Bridge-to-perm loans make a comeback, providing certainty in uncertain times Tim Madigan April 20, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email Tim Madigan Changing demographics and work concepts are disrupting today’s commercial real estate landscape, compounded by a global pandemic and uncertainty in the geopolitical and economic landscapes. Fluctuations in the U.S. market, uncertainty around the 2020 presidential election, and unpredictability in the China-U.S. trade war are also hampering economic growth and consumer confidence. These disruptive forces can make it hard for any buyer to sleep at night when they are questioning how they’ll fund not just tomorrow’s success, but the years that follow. Whether you’re acquiring or repositioning an office building, self-storage facility, manufactured housing community or a multifamily building, taking on a property in these turbulent times typically requires a multi-faceted approach to both development and its financing. Bridge loans are uniquely suited to help investors in these scenarios cover expenses in the short term until they are able to secure permanent funding. But bridge financing can also have a downside: uncertainty. A one- or two-year loan may serve you well now, but then what? When the time comes to pay up in full, what if it’s harder to get the right financing terms or interest rate you need? Many investors are finding an alternative to meet both their short- and long-term objectives: the bridge-to-perm loan. Uncertain times call for more certain financing strategies An established but sometimes-overlooked financing method, bridge-to-perm loans offer a hybrid of transitional lending as a bridge and a longer-term loan that better reflects the stability of the property. You can lock in rate spreads, supporting long-term planning and freeing you to focus on the success of your project, rather than on how you’ll secure additional funding for it down the line. Many borrowers find this kind of stability appealing given the current state of the economy. Flexible bridge-to-perm structures provide certainty for a longer loan duration at upfront terms. In today’s uncertain times, this may be one of the best financing options—knowing that your property has the bridge financing it requires and a built-in soft landing perm structure. The broad benefits of “bridging” the gap and then some The unique nature of a bridge-to-perm loan is attractive to investors who need financing flexibility and certainty on value-add and repositioned properties. But that’s not the only benefit. Buyers who can secure this type of financing will enjoy support throughout the property life cycle including stabilization, rather than having to identify and establish trust with one lender, only to have to do the dance all over again a short time later. Consider, for example, an investor whose firm secured a bridge-to-perm loan for an office property in Southern California. At the onset of the bridge portion of the financing, the building vacancy was higher than the market average. The bridge terms were laid out at 5.25 percent, with two years to perform—which in this case meant ramp up occupancy, including executing new leases under letter of intent (LOI). If those goals were achieved by the end of the two years, the interest rate would drop to a reflective spread over Treasury Constant Maturity (TCM) equal to 4.25 percent and recourse would move from 100 percent to zero. If goals were not achieved, the buyer would pay the loan in full with a conventional bridge loan. But, all signs pointed to potential success, given the property’s prime location, sponsor experience and other market factors. Ultimately the buyer leased up the property to capacity, improved the profit and loss (P&L) and enjoyed the short-term and long-term benefit of this financing structure. As a result of the improvement to the property, ultimately the sponsor opted to add some additional debt. Due to the lender’s flexibility and non-programmatic approach, the sponsor was able to garner additional proceeds after a relatively short loan duration. Is a bridge-to-perm loan in your future? Humans naturally crave certainty. In a world with very little of it, bridge-to-perm loans can help you get a better sense of what the future holds for your property, and provide lender relationship consistency throughout the lifetime of a loan. However, not many lenders offer this type of financing; most either offer bridge financing on transitional assets, or they lend longer term on stabilized properties. It is rare to find a lender with a balance sheet that can do both, and even rarer to come across a lender that can roll bridge and perm financing into one loan—but they do exist. If you’re exploring specialty loan structures, look for a lender that is willing to put a bridge-to-perm loan together and structure terms that are simple yet customized to suit your needs with added flexibility offered throughout the property life cycle. An experienced mortgage broker/lender can help you explore all the options that are out there. Bridge loans accommodate vital first steps. With a tailored bridge-to-perm loan, you will have more support once you get to the other side, too, providing you added financing security and flexibility at an uncertain time. About the author Tim Madigan is a Commercial Loan Originator with Alliant Credit Union. Experienced in retail, industrial, office, multifamily, self-storage, parking garage and hospitality lending, he has originated $250 million in less than three years at an average loan size of over $10 million.