Capital Corner: The Beauty of Bridge
Even pre-pandemic, the bridge lending market, which offers short-term financing for real estate, was robust. However, the bridge market is now exploding with new players entering the space on a monthly basis, offering borrowers flexible terms for leverage, pricing, and structure.
Bridge loans are a type of “gap financing,” with loan terms in the 2–5-year range. The unknowns of COVID-19 contributed to the need for additional options for borrowers. The result has been that life insurance companies, banks, debt funds, agencies, and others have entered the space in search of yield and opportunistic lending. The spike in bridge lending transactions, coupled with the increase in the number of lenders operating in the space, proved a solid trend throughout 2020 and remains just as robust in 2021.
Bridge loans are attractive because they can provide flexibility and terms for many different types of borrowers, especially those seeking a value-add strategy. Borrowers often develop a business plan that will incorporate capital improvements to improve the physical asset so that they can increase rents and stabilize a property, and then transition into permanent financing or sell the asset.
The leverage piece is critical as it tends to lower the cost of the capital stack. NorthMarq has been able to achieve 80 to 85 percent in certain situations – which allows a borrower to provide less equity and lower the cost of the capital stack.
Commercial properties like office don’t always know exactly what their future costs will be, so a bridge lender will structure “good news money.” This allows for some flexibility in the budget as the borrower signs future leases, the lender will advance capital for tenant improvements, capital buildouts, etc. This helps the borrower have comfort that capital will be available as they execute their business plan and accretive leases.
When NorthMarq takes on an assignment for a borrower, it takes a “no-stone-left-unturned” strategy. Because of the increasing number of new bridge lenders, the competition can be fierce and lenders – just like borrowers – are competing for product.
Multifamily and Industrial receive the most aggressive pricing, which has continued to compress. Particularly on the multifamily side where debt yields on loans are very low, the bridge lending market has been able to achieve accretive leverage.
NorthMarq works with a number of propriety groups, including life companies, institutions, and fund advisors. We also service loans for many of our bridge loan providers. This can be an important piece of the transaction and critical for the smooth implementation of future capital programs.
Two recent bridge deals arranged by NorthMarq
NorthMarq’s Dallas office arranged the sale and financing of the 836-unit 8500 Harwood Apartments near Fort Worth, Texas. The property is a mid-1980s-built complex with largely classic interiors.
The buyer was S2 Capital, which has plans for a $12 million upgrade that will include upgrades to the rental units and renovations to the clubhouse, pool, and common areas.
NorthMarq arranged acquisition financing through a bridge loan for the borrower through its correspondent relationship with Voya. The transaction was structured with a three-year term on a 30-year amortization schedule. Voya was able to offer the best combination of proceeds and rate.
The flexibility of the financing allowed S2 to set up their business plan around their three- to five-year capital event and provided the upfront leverage at very attractive prices. S2 will drive rents accordingly, and sell within three to five years.
This is a great example of a value-add transaction with a highly qualified sponsor. From NorthMarq’s perspective on the financing side, having a well-heeled borrower like S2 and a tangible, valuing-creating opportunity allowed us to go out and drive the market and produce best-in-class terms.
In a recent office transaction, NorthMarq’s Houston office arranged the acquisition financing for the 250,000-square-foot Westchase Royal Oaks property in Houston.
The transaction was structured with a five-year term with two years of interest-only followed by a 25-year amortization schedule. NorthMarq arranged the bridge-to-permanent loan for the borrower through its relationship with a national correspondent lender.
The Class A asset traded at a significantly discounted price. Due to the pandemic, however, most lenders are hesitant when it comes to office product. NorthMarq successfully navigated the challenging lending environment and obtained a 70 percent LTV bridge-to-permanent option with future funding for TILC’s at 3.75 percent fixed rate from a national/correspondent lender.
There is a significant amount of uncertainty in the office sector around when people will return to the office and what it will look like from an employment and use standpoint post-COVID. The buyer of Westchase is comfortable with office product and acquired the property for less than $70 per square foot. The new owner made a decision that there are enough leases in place and enough upside that they are willing to take some risk and invest in capital expenditures.
NorthMarq was able to help the borrower obtain financing that allowed for the acquisition and CapEx but also provide for future tenant improvements and leasing commissions, which is key in being able to react and sign leases.
This transaction was a marrying up of a business model and a plan for an asset with a national, bank-type lender with some burned-off recourse, so they provided the best combination of pricing and proceeds. It was a win-win for the borrower and the lender. It is unclear at this point whether the borrower will sell or hold on to the office asset.
The key to bridge: Make sure your financing partner has access to enough options to find the right fit for your situation.
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