The truth about "bridge to bridge" financing

“Bridge to bridge” financing, in the commercial real estate context, refers to the origination of a bridge loan (a short term commercial mortgage) that is used to pay off a previous bridge loan.

The term “bridge” hints at the purpose of such short-term commercial mortgage notes in general — they are aimed to help a property investment improve to the point where it is now in a new place altogether. If a property lacks cash flow, or has fallen in disrepair, a bridge loan can help provide the financing to reach a new state of higher cash flow. Generally, bridge loans are more expensive than longer term commercial financing (more expensive = higher rate). So the aim of the bridge loan is to reach that place where a lower rate loan is available.

If the bridge loan hasn’t accomplished that goal, that’s where a bridge-to-bridge comes in. If the bridge loan is coming due, but the property is not yet stabilized, a second bridge lender can give the investor another chance to get there.

The problem

The problem with a bridge-to-bridge scenario is that it’s a negative signal right off the bat to the potential lender. This investor already received a bridge loan with this same property, and didn’t stabilize it in time to get permanent financing. Why would the second go-around be any more successful?

Some bridge lenders have a blanket rule against lending in this scenario at all. Others will up the rate and fees required to lend, or shrink the available leverage. With lower leverage, the new loan may not be able to pay off the old one, which would mean the investor needs to come out of pocket to put in more equity. With a struggling property, that could be a hard proposition.

The options

If your original bridge loan is up, and your property is not yet ready for permanent financing, acknowledge that your options are more limited. But you do have a few:

Hard Money Refi

“Hard money” is a term often used interchangeably with bridge lending. The way I think of it, hard money means an expensive bridge loan. That may come through a higher rate, more origination points, or both. If your original bridge loan was at 8%, your next may be at 12% with multiple points origination.

Pitch in more equity

This may be in conjunction with the hard money refi, or with a less expensive bridge loan from a new lender (or an extension with your current lender). Perhaps your first loan still has a $5 Million balance due, and your new bridge loan is also for $5 Million, but with closing costs you’ll need to come out of pocket with more equity.

Sell

This is often a last resort for a developer, as it concedes that the project won’t reach their original expectation of profits. Selling may be the best business option in some cases, but even when that is the case, that course may look less attractive because it can seemingly concede a failure. If the project was marketed widely and then not brought to fruition, that could have a negative impact on the sponsor’s reputation which they’d like to avoid. Nobody is proud of a bridge-to-bridge financing, but it can happen quietly, vs selling the property which will leave a public trail.