5 Things Savvy Borrowers May Not Know About Bridge Loans

After years in the real estate business, Charles Flanagan thought he knew all the ins and outs of the borrowing game. The upstate New York-based investor had experience with traditional lenders as well as using bridge loans for building up his portfolio of shopping centers and other projects. But like many businesses affected by the financial crisis of 2008, the rules of the bridge loan game have changed in the ensuing years.

Kevin Wolfer, President and CEO of Kennedy Funding has heard many clients express surprise at how the world of borrowing has changed from just a few years ago. “Rates are the most obvious difference,” he says, “they’re at historically low levels. But really, that’s just the start of it.”

In Wolfer’s opinion, the five biggest misconceptions about the business are holding back a lot of otherwise worthwhile projects. Start with the fact, that in his words, “too many people think they can’t get funding in this tight credit environment.” Next, he says that people fear pre-payment penalties that in most cases aren’t there. Third, in a word: fees. Wolfer notes that for some bridge loan deals, the fees total less than 2% of the loan. “They’re frankly a cost of doing business with any hard money lender but when you compare them to the cost of a project going under or taking on partners, they’re a rounding error,” Wolfer says. The fourth biggest misconception about bridge loans revolves around size. Bridge loans aren’t just for small amounts to get a project over a hump. Loans today can be had for big sums, up to $50 million in some cases. And the loan can be up to 75% of the value of the property. Wolfer’s firm has closed on over $2 billion in loans and adds that the value of them is only moving in one direction. Finally, the myth Wolfer would most like to lay to rest is about land. “Borrowing for land isn’t off the table. With the right deal in place, we can make land deals happen,” he says.

While bridge loans may not have a place in every commercial real estate deal, they make sense for many real estate players who often don’t know how far bridge loans have come. For the savvy few, it’s a whole new ballgame.