There is something very interesting about a boxing match when two fighters with similar skill sets are entertaining a vast audience. It is rare to see one opponent win by technical knockout (TKO). The match is typically won in higher round by options and points differential or a draw. Certainly, there are numerous pros and cons, strengths and weaknesses for both boxers, nonetheless there is another crucial thing both fighting entertainers provide the crowd with – Finish Result. Bridge and hard money lending are similar to two boxers in the ring. Now, before I expand on this small cautionary tale, you must understand that this is not a history about any boxing legends or the types of lending that will be discussed either. This is simply a quick financing fight primer between The Bridge and The Hard Money. They must settle the score for the audience and deliver some valid and quick points for why a borrower should choose one over the other– Finish Result
Referee: Ladies and gentlemen! Welcome to our most anticipated match to date yet, from New York City please clap your hands for, “The Hard Money” and representing Boston Massachusetts, stand up and help me introduce loud and clear, “The Bridge”
Referee: Gentlemen this is a match about options, terms, strategies, risks, capabilities and most importantly result. The rules are simple. Each of you will have up to 5 rounds to explain to the audience, the borrowers, why you should be a winner in a commercial real estate loan transaction. Please shake hands and the ring is yours.
The Bridge Loan:
I am a short-term loan typically from 6 months to 3 years. I am designed to help borrowers acquire new property quickly because I provide them with extra time and flexibility to sell their existing property. I am secured by real estate; therefore, you can essentially call me an equity based loan where a lender primary concern will be about the market value of the property and the amount of equity once financing is completed.
For commercial real estate I tend to fall between 50% to 75% loan-to-value (LTV). My loan amounts can range anywhere from $1,000,000 to over $10,000,000 and interest rates can be anywhere from 6% – 12%. Typically, the LTV, interest rates, and loan amount will be based on the marketability, value of the asset, history of the borrower, the property, underwriting, credit, risks management, and much more. An important aspect of my LTV is my security position. Certain bridge financing firm will consider senior mortgage position and while others will view me as junior or second mortgage position in their capital financing structure.
Additionally, some of my benefits include:
- Interest-only payment (IO). This is key for my borrowers because debt service is lower and affordable.
- No prepayment penalty. Yes, my borrowers can elect to pay my loan early.
- Special situation such as 1031 reverse exchange can be applicable.
- A borrower may be able to finance 100% of acquisition and not have to use his/her own equity stake for down payment.
Referee: Bridge, it is excellent to hear about why many borrowers enjoy short-term financing secured by real estate. What about you hard money, what is your take? Don’t swing too hard.
The Hard Money Loan:
Many borrowers mistakenly believe that I am a Bridge loan. That is simply incorrect. Although, at times I may behave like Mr. Bridge due to similarity in LTV, loan amount, interest rates etc. Typically, as a lender, I issue very short-term loan usually 12 to 24 months with possible extensions. I am a wealthy accredited individual, an owner, developer or investor. My borrowers tend to be inexperience, have significant credit issues, need the funds quickly, and usually have other red flags with them that a traditional bank or other non-traditional financing company won’t bother financing their deals.
Interestingly, while institutional mezzanine lenders and equity loan program can be a major source of funding that may look more appetizing than the hard money. Unfortunately, the strict aspect of documentation, economically sound bullet proof borrower attributes can sometime leave a borrower in the dust, with no funds to get his/her project done. As mentioned earlier, private money loan is made by high-net worth investors with high liquidity profile, unparalleled business networks, well-connected, who are seeking higher return on investments through loan funding as opposed to actively acquiring properties as active investors and managing the assets.
My philosophy is “loan to own and greater return on investment.” As such, I am willing to take more risks than The Bridge. Again, my borrower can be an inexperience developer, investor, who wants his driven strategy for a target development or re-development project to work. As a result, the borrower is more willing to work with me. My loan amount can range anywhere from $1,000,000 to over $10,000,000, with interest rate range from 8% to 20% depending on LTV (usually from 50% low to 75% max), and the associated transactional risks.
Some of my benefits include:
- Interest-only payment (I/O). This is key for my borrowers because debt service is lower and affordable.
- No prepayment penalty. Yes, my borrowers can elect to repay the loan at any time during the required term.
- Very fast closing – usually 7 to 10 days for non-bankable transactions.
- Ability for assets cross-collateralization, second mortgage position and equity participation.
Referee: Now I am sure your borrowers will get a better grasp why The Bridge is similar but not quite the same Hard Money. With that aside, can you both tell the spectators about your underwriting criteria and exit strategies?
The Bridge quickly land another jab and uppercut as fast as possible. My underwriting criteria involves lots of documentation and analysis of the deal and the borrower. For instance, a preliminary underwriting and due diligence will be conducted first based on certain required documents such as: description of collateral, 3 years of most recent tax returns, debt schedule for loans that does not reflect on credit reports, biography of parties involved, personal and business balance sheet, etc. As far as exit strategy, a proposed strategy will be discussed with the borrower and given in written format about repayment of the loan either at the end or during the term period. My best strategy is a specific event that will create proceeds payable directly to the lender.
The Hard Money maintained his balance from falling to the ground with such a heavy uppercut and quickly took a hook shot at Bridge. The biggest difference for underwriting in addition to what Mr. Bridge stated is careful legal documentation that are recommended and reviewed by legal counsel. In today’s lending environment, even with less red tapes, underwriting standards are at a level that is consistent with other institutional lenders. For exit strategy, all clauses that is pertinent to risk and reward benefit both the borrower and lender is explained for the duration of the loan. Additionally, a sound exit strategy from the borrower after finishing the project and owning the property is heavily emphasized and drafted in written format before funding can be rewarded.
Referee: Ladies and gentlemen, the match has finally ended and it was an interesting financing battle overview between Bridge and Hard Money. With all the various financing punches, jabs, swings, and uppercuts from each party, it has been determined that this match is a draw.
Ultimately, while this was an entertaining financing match with display of underwriting benefits, terms, interest rates, how to get funded, and exit strategy, it is crucial for the borrower not to take Bridge and Hard money equally in terms of funding. The similarities are enormous. Nonetheless the uppercuts of interest rate, lender type, servicing the debt, geographical area, due diligence, underwriting criteria, documentation, and how a transaction will get funded is significantly different. A borrower should understand their project, level of experiences, the story about their collateral, why is the fund needed, for what purpose, and what their exit strategy is. As a result, this level of understanding and preparedness will aid in recognizing if a Bridge or Hard Money loan is better suited for the project.
By: Ibsen Alexandre
Ibsen Alexandre offers his opinions about real estate finance, business, and investment at www.Refivest.Com and other real estate publications. He can be reached at firstname.lastname@example.org
The opinions expressed herein are those of the author(s) and do not reflect the view of a particular firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation to lend.