Construction and tenanting of your multifamily development project often comes with some complications. Construction might take longer than planned or might go over budget. Contractors might bow out or bad weather might cause serious delays. Development is full of surprises. In cases like these, you may find that your construction financing runs out before you have your permanent financing in place. If you are not fully tenanted, you may not have a sufficient cash flow to maintain payments on the construction loan and operations at the development. This is when it’s important to know how to get a bridge loan for multifamily real estate.
Getting a Bridge Loan for Multifamily Real Estate Development
A bridge loan is a short-term, relatively expensive loan intended to be repaid quickly. Usually, it comes from a non-bank source, such as a finance company, which is not subject to federal regulations. While the absence of regulation makes it easier for the lender to approve you, it may increase your risk, since government guidelines are often intended to reduce risk on both sides. Your property serves as collateral for the loan, and if you borrow incautiously, you could lose it.
Rates on bridge loans generally start a few percentage points above commercial mortgage rates and may rise into the teens. Fees are usually rolled over into the loan, but they can be high—even as much as 6 percent—as well. Funding is usually considerably faster than traditional loans—about 10 to 45 days. Other conditions may be flexible. Terms often range from six to 36 months, with an option to extend. The loan-to-value rate (LTV) could be 40 percent or as high as 85 percent. You will likely make interest-only payments for the life of the loan and pay back the principal when you refinance.
A bridge loan is a type of hard money loan distinguished by its purpose and, possibly, by a better rate. Hard money loans are used when other forms of financing are not available. They can be used for many purposes in commercial real estate. A borrower that was unable to get a traditional commercial real estate mortgage might use a hard money loan to purchase and reposition a multifamily property, for example. Again, that borrower would be counting on refinancing the loan at a better rate when the repositioning was completed.
Alternatives to Bridge Loans
There are ways to avoid the need for a bridge loan. One is to look for more conventional sources of credit. Your construction lender or another traditional lender may be willing to make a loan in case of a funding gap in your project, and provide better conditions than what is usual for a bridge loan. Loans like this are called mini-permanent loans or “mini-perms.” These loans typically have rates 1-1.5 percent higher than your construction loan. Unlike a bridge loan, a mini-perm is considered a mortgage, so it helps establish a credit record for your development, which can make it easier to find permanent financing and may improve the conditions on it.
The other way to avoid the need for a bridge loan is by getting construction-to-permanent financing—a single loan that, as the name implies, will cover both construction and the long-term financing. This means that there will be a short-term, higher-interest construction phase that will convert to lower interest and a longer term at the completion of construction. This saves at least one set of closing costs (more if your construction loan includes acquisition and development), and you may have the option of locking in your permanent financing rate at the time the loan is made. If interest rates are rising, this can be a substantial advantage and could save you time and a lot of stress. If your financial circumstances change during the course of construction, the lender has the right to alter or even cancel the permanent portion of the loan, however.
Construction-to-permanent financing is usually only offered to well-established developers—another reminder of the importance of experience and reputation, and of the value of working with a partner who has standing in the community.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and multifamily real estate valuation to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.
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