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The Difference between Bridge Loans, Mezzanine Loans, Private Loans and Hard Money:
I see a lot of confusion amongst people when referring to the above types of loans; they are intermingled constantly. Let me try to share the key differences and what is available. These loans are hot right now and we are closing a lot of them but you need to know what is what.
Bridge Loans: Bridge loans are just that, interim loans to “bridge” the gap between the current situation and the exit strategy. Bridge loans typically have some cash flow but for some reason, will not qualify for conventional lending right now. You see these mostly on investment properties. For example, we just closed a $2 million plus bridge loan on an apartment complex purchase. This is a very common type of bridge loan. Because the complex was only 67% occupied and needed work, it would not qualify for conventional financing. Experienced investors with good credit are beginning to gobble up these properties at great prices and with their knowledge and some work; they can often fill the property up in less than a year. Bridge loans are typically 75-80% of value/sales price, 10-12% in interest rate, 2-3 years fixed, interest only payments and points can range from 2-6. Is it cheap? No. But the borrower cannot get a FNMA rate of 6% right now. The key is, they are buying a property at $2 million say, that once full, will be worth $4 Million – doubling their money. Then, a refinance to a 6% rate is easy. The result is $2 Million in profit. Yes, the rate they paid was 6% higher than normal for 1 year but that extra interest of $120K yielded them a $2 Million return. What a deal! We have multiple great sources for these and can close them quickly – in less than 30 days.
Hard Money Loans: These loans are for specific situations where speed is of the essence and cash flow may not be available. Vacant warehouses, raw land, properties that have value but don’t have cash flow. Hard money loans allow you to tap these properties and close quickly. These loans typically can close in 2-3 weeks. LTV’s are much less, 50% is the norm. Credit is not as important but the loan has to make sense. Hard money is not dumb money. They are taking advantage of an opportunity and there is a firm exit strategy. Hard money lenders do NOT want to foreclose-they want their money back in 12 months. We closed one of these last week where a borrower tapped a property that he owned free and clear to finish the build-out on another property where he had the end loan already approved, but needed the construction money and could not get it. When the construction is finished in 6 months they will close on the end loan and pay off the hard money loan. Terms are higher, 14-16% or more, and usually 4-6 points or more. Most real hard money lenders have very set guidelines that they go by because they have investors who expect a certain yield with minimal risk. They can close very quickly.
Private Money Loans: Private money loans are loans from individuals; the rules are not necessarily set in stone, each deal is underwritten individually. The general parameters are low LTV’s (65% or less) and good exit strategies. The deals have to make sense. Our net branch has their own private money fund and the owner is the underwriter and his brother is the credit committee. We have closed 3 deals in the last 4 weeks. One was a general store in Oregon, not a franchise, where the store made money and the borrower had OK credit but he did not have any experience. A year from now, after running the store for a year, no problem refinancing him SBA 7A but today, he cannot get approved. We rolled over his IRA to get him his 15% down, allowed a seller second, and closed the loan quickly. Another deal was an empty warehouse in Michigan that just needed a few hundred thousand to make the warehouse acceptable to the new tenants that were signed and/or considering. At 25% LTV, the deal worked for us. They already had one tenant signed in and so the deal made sense. Private loans have a lot of flexibility and can close quickly, usually in under 30 days. Rates on our fund run 11-12% interest only for 12-24 months, with 4-5 points. We keep upfront costs to a minimum and will use review appraisals to speed the process up.
Placing the deal into the right program is the key. Loans that bridge lenders like won’t work for hard money lenders and vice versa. Knowing what you can and can’t do and what is really funding out there is critical. THERE ARE A LOT OF BROKERS OUT THERE PRETENDING TO BE LENDERS AND MAKING A LIVING OFF OF UPFRONT RETAINER FEES BUT NEVER FUNDING ANYTHING. You must be careful. We are the real deal and are closing loans every week. Yes, I do a lot of conventional loans but we can get these types of loans done and really close them, every single month.
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Commercial Real Estate Finance
