Bridge Lending 101: How to Shop for the Perfect Loan

By Eric Jordan, Vice President, Calmwater Capital

Whether you’re planning a trip or buying a car, there are more than a dozen guidebooks on how to choose the right option. However, when it comes to a significant decision like choosing a commercial real estate bridge loan, there is a surprising lack of literature on how borrowers can identify the best loans for their projects. In the current lending market, bridge loans will become increasingly vital.

Following the Great Recession, banking regulations significantly tightened, which led to the current appetite for bridge loans among borrowers. Most conventional lenders exited the space, with flexible, albeit more expensive, capital filling the gap, promising certainty of execution for the acquisition or refinance of transitional assets across the country.

While new options emerged in 2010 and 2011, the access to bridge capital was not particularly widespread until more recently, when different capital sources saw the proven returns generated by various players throughout the capital stack. The pool has since grown substantially, increasing competition within the bridge loan space.

To fully understand the current bridge lending market, it’s important to first identify the types of lenders and what they’re offering. On one end of the spectrum are institutional debt funds, which typically provide lower-cost, lower-leverage loans and generally lend on core, institutional assets in primary markets. On the other end, you’ll find high-yield, high-leverage lenders like Calmwater Capital, which can close quickly and provide flexible structures in order to allow borrowers to execute their distinct business plans. Experienced lenders in the bridge space have filled a niche that differs from that of permanent lenders, in that capital can be provided for non-cash-flowing or vacant properties, where competitive lenders are focused on basis and bridging to the permanent loan take-out.

When a borrower is weighing the available bridge options in situations where the closing timeline and structure are most important, a few key criteria are crucial to consider:

1. Certainty of execution: In such a scenario, a lender’s reputation of closing should be taken into account over pricing. While one lender’s pricing may seem superior, pricing should be secondary if a competing lender has a reputation of following through and a solid track record in the market.

2. Geography: Borrowers may also consider geographic location and the lender’s experience in a particular submarket. This expertise makes conversations about the project easier, as the lender will not need to acclimate to the specific market’s trends. However, a proven, national lender should be able to familiarize themselves with a particular location or asset class quickly, while maintaining high underwriting standards and meeting borrowers’ expectations.

3. Product type: As market conditions change, borrowers may find it difficult to find financing for certain asset classes. In recent months, many bridge lenders have become significantly more selective when considering land loans or—with the changing retail landscape and widespread store closures—loans secured by retail properties. Borrowers should not be surprised, as lenders tighten their leverage levels on specific asset classes or geographic locations that have higher perceived risk. However, bridge lenders that provide the most value to borrowers are those that adapt to changing markets and can analyze transactions on a stand-alone basis, instead of blindly following widespread macro-trends.

In the current regulatory environment, the need for bridge loans won’t disappear any time soon. If borrowers keep the above in mind, they will be better equipped to pick the best bridge solution for their projects.