Bridge loans are popular among apartment property investors as a short-term, flexible financing option. Though not feasible as a permanent financing method for acquiring an apartment property, bridge loans can be deployed for a number of uses — and in many cases are leveraged to increase the profitability of an investment or improve cash flow.

Commercial bridge financing — when utilized appropriately — can provide significant benefits for investors. That said, with such an immense offering of permanent apartment property financing options to consider, bridge loans can be slightly undervalued to less-experienced investors. This guide demystifies commercial bridge financing in the world of apartment property investing.

What Is a Commercial Bridge Loan?

A bridge loan, while simple enough in structure, is a unique type of short-term financing. Sometimes referred to as swing financing or gap financing, these loans were named for the way they can “bridge the gap” between an investor’s immediate need for capital and a permanent financing solution. In many cases, these loans are deployed to finance a commercial real estate investment opportunity when the timing of the financing is critical.

Since the “bridge” portion of the moniker really only describes the use of the loan — not any specific characteristics — any type of loan could technically be utilized as commercial bridge financing. That said, the commercial bridge loan terminology is used within the industry to refer to those specific options which immediately finance a real estate purchase or renovation while the borrower arranges other, longer-term funding.

Key Bridge Loan Attributes

There are a few key attributes shared by most commercial bridge loans that make this type of financing unique. Some of the these include:

Shorter Loan Terms

Bridge loans are not a permanent financing solution. Instead, they are meant to provide a fast source of capital while permanent financing can be arranged. Therefore, bridge loan lenders typically expect full repayment after anywhere from three months to three years — with most borrowers offering loan terms between 12 and 24 months.

Provided by Private Lenders

While bridge loans are technically offered by most commercial real estate lenders in some form, a sizable portion of bridge financing comes from private lenders. Some apartment bridge loans are even offered by venture capital firms.

Property-Focused Eligibility

Unlike many financing vehicles that focus more on a borrower's creditworthiness, bridge loan eligibility generally depends on the value of the target property more than any other factor.

Bridge Loans Close Faster

Unlike almost every other commercial financing vehicle, bridge loans have rapid turnaround times, both for closing the loan and releasing funds. This, however, usually comes at the price of significantly higher interest rates.

Bridge Financing Advantages and Disadvantages

Advantages:

• Immediate funding for purchasing a property or satisfying existing obligations
• Offered by traditional lenders and alternative funding sources
• Eligibility based on collateral more than personal credit

Disadvantages:

• Substantially higher interest rates and fees
• High risk of losing collateral in the event of a default

Uses for Commercial Bridge Loans

Investors may consider commercial bridge financing for many reasons for an apartment property investment, but there are a few primary reasons that drive many of these loans:

• Making an immediate acquisition, particularly given time constraints
• Funding improvements to a property for permanent financing eligibility
• Obtaining capital to support lease-up activities
• Gaining capital while improving borrower creditworthiness
• Accessing capital while securing permanent financing
• Early funding to ensure smooth operation while ownership interests are sorted out or while putting together a project team
• Funding property operations while ownership is structured or a team assembled

Buying and Renovating an Apartment Property With Bridge Financing

Savvy investors interested in flipping properties often utilize gap financing to acquire apartment properties at a substantial discount, particularly when an asset is in poor condition or during adverse market conditions.

Bridge lenders typically determine a value for the renovated property that includes both the purchase price as well as the cost of the rehabilitation or renovation to be done. This value then serves as the investor’s borrowing limit. Across the industry, bridge loans are generally offered to borrowers at 80% of the loan-to-cost value of the property.

With the rapid funding provided by the bridge loan, an investor is able to almost immediately begin any rehabilitation or renovation that needs to be done. Once the work is complete, the investor can then sell the newly renovated property at a significantly higher value. When deployed correctly, this allows investors to not only pay back the bridge loan but also turn a decent profit from the flip.

Two Important Bridge Financing Considerations

When considering whether or not a commercial bridge loan is the right option for an apartment investment, there are a couple of loan characteristics worth keeping in mind, beyond the standard qualities such as interest rates, loan amount, terms, fees, and so on.

Funding Time

Due to the very nature of bridge financing, the most crucial consideration is the timeframe for approval and subsequent release of funds. Bridge financing is one of the few funding vehicles that doesn’t come with a hefty waiting period for an approval or for capital to be released. That said, bridge financing can come from so many different sources and lenders that it would benefit an investor to gain a good idea of how a particular bridge loan will work within an investment's unique timeframe. Typically, traditional lenders like banks are slow to fund any of the loans they originate — and this comes after the notoriously lengthy loan application and underwriting process. A good portion of the time, turning to alternative capital sources such as hard money or private lenders is the best option, as many of these sources can provide funding in as little as a few weeks.

Prepayment Incentives and Discounts

Prepayment penalties and incentives can play a huge role in the cost effectiveness of any apartment financing. With short-term bridge loans, it makes sense for investors to pay lenders back as soon as possible — a feat which typically incurs some costly penalties with traditional financing options. 

A good bridge loan, however, should be the opposite. It isn’t uncommon for bridge loans to be amortized, which saves investors more money the earlier the balance is paid. Even so, some bridge loans come with a factor rate that ensures that borrowers pay a set amount of interest regardless of the time of repayment. In the latter scenario, a good practice is to find out if the bridge product comes with a prepayment discount. Either way, understanding the potential costs of prepayment can help investors maximize profits when utilizing bridge financing.