As the nation continues its steady recovery from the COVID-19 pandemic, we find ourselves in a hyperactive housing market characterized by very low interest rates, skyrocketing demand and substantial lack of supply. Investors may wonder how to benefit from these unprecedented conditions in which returns and income are hard to find. Broadmark Realty Capital (NYSE: BRMK) has historically provided investors the opportunity to passively generate income from a risk mitigated portfolio of conservatively underwritten construction loans. In our previous article, The Stages of Construction Financing – Creating Value for Borrowers and Investors at Every Step, we discussed the value we provide to borrowers and investors at each step of the construction process, from purchase to completion. In this article we examine the stage of financing that happens after completion – the bridge loan.
What is a bridge loan?
Bridge loans are short-term, generally ranging from three to 24 months. Our experience in credit markets has shown us that interest rates on first position deed-of-trust bridge loans tend to be higher than those on permanent financing yet lower than those on construction loans.
Proceeds from a bridge loan are used to take the project from completion to the next stage, which is usually permanent financing or sale. Operating expenses and general management of the property need to be paid during this time and a bridge loan can be a good solution. Sometimes the borrower needs to “stabilize” a project – leasing units or making renovations to meet the underwriting guidelines of permanent lenders or obtain a higher price from a buyer.
A bridge loan can also allow a borrower to take advantage of opportunities in a fast-paced market, allowing them to complete the purchase of a property while waiting for traditional financing or proceeds from the sale of another project.
There are times that a bridge loan is used to repay an equity partner. The cost of a bridge loan may be the same as the payout rate to an equity partner with the added advantage that the borrower can take back ownership of the project.
Bridge loans provide value to the borrower through the efficiency in which they are processed. They must be approved and funded quickly to bridge the gap between construction and permanent financing or sale.
What is the outlook for bridge loans?
Bridge loans have emerged as excellent options to aid builders and developers as they seek to expeditiously purchase, stabilize or reposition real estate projects.
There are few lenders that finance multiple stages of development, and borrowers can spend time and energy searching for reliable financing at each stage. As homebuilders and developers continue the rush to meet soaring housing demand, a lender that provides certainty of execution from start to finish is an attractive proposition to borrowers.
Bridge loans generally have a lower risk profile than construction loans because the collateral has usually been completed and may already be income generating. In some cases the lender can establish an escrow account for the rental payments generated by the property and capture that income in case of default. In a low interest rate environment, where it is difficult for investors to find risk-mitigated investments that provide income, investing in bridge loans can be a good option.
As homebuilders and developers work to meet the huge demand for housing, there will likely continue to be a stock of finished properties that will require post-construction bridge financing. An experienced lender with disciplined underwriting standards, an established infrastructure and a firm eye towards the future should be able to provide a vital service for quality borrowers and an attractive opportunity for investors.