Spotlight on Bridge Loan Transactions
• U.S. private funds targeting debt investments in commercial real estate assets fundraised a record $20.9 billion in 2015. Institutional lenders have increased their share in this growing private lending market by sponsoring debt funds with $54.4 billion in flows occurring in 2015.
• Increased regulation in the CMBS space, with issuers having to take equity stakes of 5% according to the “risk-retention” rules, have led to significant widening of spreads in the last year. Legacy issuances have seen spreads widen by 100 bps over Libor since April 2015.
• Many non-bank bridge lenders are funding transitional assets on a non-recourse basis. In exchange for non-recourse debt, private bridge lenders are typically pricing 300 bps and higher above comparable recourse bank financing.
• Typical financing packages carry terms of 8-24 months and interest rates of 8% or above. Additionally, extension clauses are built in that can extend loan terms up to 12 months but require extension fees of 2% and higher.
• Market competition has resulted in higher initial Loan-to-Cost for solid borrowers, provided the stabilized LTV is 75% or less.
• Many bridge lenders, comfortable with underwriting transitional assets, are financing properties with diminished or no cash flow. Reserves can be built in to fund future improvements and/or leasing commissions to provide the borrower with a clear path to execute a value-add investment.
• Experienced borrowers with quality opportunities can place a second trust, mezzanine, or preferred equity behind their first deed of trust.