Bridge financing critical for entrepreneurs

As my colleague Stephen O’Connor says, “bridge lenders are keeping the industry going – they lend where others won’t and have a penchant for executing on the most innovative hospitality projects.” This is truer now than it has ever been with established equity investors seeking portfolio diversification and enhanced yields despite macro-economic factors and the post-COVID recovery working against them.

Contributed by Andrew Heilmann, RobertDouglas, New York City

In both good markets and bad, bridge lenders have remained a steady and reliable source of debt due to their creativity and flexibility in providing hotel financing. These lenders continue to close on loans despite macro- and micro-economic complexities.

Bridge financing is an institutional debt solution that provides a runway for a near-term real estate execution that is too complicated or speculative for a traditional “permanent” balance sheet lender, too time-constrained, not rich enough for a hard money loan, or simply lacks operating history and proof of concept.

In our experience and view, bridge financing is NOT about “rescuing” a project – the business plan must be there – it is about providing a thoughtful financing solution to facilitate the short-term execution of a project. Where traditional permanent lenders have strict parameters, bridge lenders have flexibility to structure a loan to get the deal done as long as the underlying collateral value is there.

Recent examples where we’ve seen bridge lenders step up include: a sponsor breaking out on their own for the first time, a conceptual (but supportable) business plan, a lack of consistent or sufficient operating history, an entitlement process for a “flip,” and bringing an existing property through a renovation and repositioning. Bridge debt can be used as a short-term hedge in an evolving interest rate environment or when there is some uncertainty in the final project’s execution. For instance, buying land and entitling it is a great use of bridge financing and, depending on the terms and structure, can provide the flexibility on the back end to either sell the entitled development site or execute the project directly. In every case, there is a level of risk which bridge lenders are compensated for – typically on fees.

Coming to terms

One of the primary ways bridge lenders differentiate themselves from more traditional debt sources is their underlying flexibility, which translates not only to funded deals, but, also, to a faster execution (weeks instead of months). Due Diligence is still required, but bridge lenders tend to come to their own opinion of value internally and may waive some of the traditional “check the box” items as a result. Depending on the nature of the loan’s focus and being collateralized by the underlying value, any added risk for any reason (timing, history, etc.) is simply passed onto the borrower rather than closing the door.

“In our experience and view, bridge financing is NOT about ‘rescuing’ a project – the business plan must be there – it is about providing a thoughtful financing solution to facilitate the short-term execution of a project.” – Andrew Heilmann

The typical loan terms we are executing right now are:

  • Term: 1-3 years
  • Extensions: Two 6-12 month options
  • LTC: 55%-65% of the total capital stack
  • Rate: Floating and I/O
  • Origination Fee: 1%-2%
  • Extension Fee: 0.25%-0.5% per extension
  • Exit Fee: 1%-2%
  • Pre-Payment: Highly flexible

Ultimately, bridge lenders are “velocity lenders” focused on turning loans over rather than longer terms.

No time like the present

This past cycle was facilitated by the debt funds providing bridge financing as a flexible option when the deal didn’t work for the strict underwriting standards and regulations of the CMBS market. Overall, the industry recovery post-COVID is prompting increased acquisition, repositioning, and development activity – many of these hotels will need substantial CapEx and FF&E funding to execute the business plan to unlock investor’s value – a perfect execution for a bridge loan.