Bridge Lending

Bridge loan financing is a time honored component of the project financing stack. Developers seeking to execute value adding strategies to real estate projects avail themselves of bridge financing on a regular basis. It is called bridge financing because it is meant to “bridge” a project from one point in its life cycle to the next. The value created by this process needs to be significant because the project sponsors typically “turbo charge” their yield by placing mezzanine debt “on top” of the bridge financing to create a complete transaction financing package. The borrower then has very little equity in the transaction and by definition the sponsor’s cash on cash return is enhanced dramatically.

Well, we all know what happened to the mezzanine and bridge lenders in August. They pulled up their tents and decided to reevaluate their positions. That created a new opportunity for local bankers and new sources of mezzanine financing to enter the market – and take advantage of the higher yields available to them by the change in market conditions.

Bankers such as Raul Valdes-Fauli (President of Colonial Bank in Miami-Dade County) are indicative of the post-August bridge lender mentality. He is a local banker that is seeking to expand his book of business just as his out-of-town competitors reevaluate their loans and pull back in his home market.

Colonial is seeking bridge loans in the three to five year term. They are teaming with seasoned developers to execute value add transactions. Even with the credit readjustment Colonial has been very active. While the current credit environment has caused Colonial to tighten up standards a bit they are still in the market looking for loans. Colonial is focusing on borrowers that value a local lender that is in the market for the long haul. This is a common theme for many local “home town” and balance sheet lenders. They lost short term market share because they held to their credit standards during the past cycle. Now, these lenders with limited exposures are aggressively offering programs to bring liquidity to quality projects in their home markets.

According to Bank Atlantic’s Neil Efron, a senior vice president and manager of their commercial mortgage banking division, the Bank has addressed the current market volatility with a new bridge loan product. It is designed for those borrowers who need to finance but are unwilling to lock in for the normal 10 year permanent at today’s spreads. The product is a fixed rate loan indexed over the 3 or 5 year treasury at 225 to 250 basis point spreads. The loan is recourse but allows for flexible prepayments. The 3 year deal can be prepaid at par and the 5 year will have a negotiated, modest prepayment penalty.

While it has some material differences from most historically available bridge programs, BankAtlantic has created a product with wrinkles that are certainly appealing. Most bridge loans in the past have been non-recourse but also most of those deals did not have flexible prepayment options.

Another variation of the bridge loan – the condominium inventory loan is making an appearance. This bridge loan is for developers that want to free up equity in units they own but are unable to sell. As the credit markets continue to be challenging to navigate we will see more seller financing. Sellers will take back paper to facilitate a sale for their buyer who may not be able to get the same terms post-August that he was getting prior to. There is a significant secondary market forming for this type of paper. Most of the secondary market is comprised of high net worth investors chasing yield.

The mezzanine lender and/or institutional equity partner would be the second component of the capital structure for most bridge loans. These are VERY different sources that occupy the spot “above” the bridge lender in the capital stack. Many mezzanine lenders/equity partners have seen their position compromised in recent months and have pulled out of the market. This creates an opportunity for players to emerge in this sector. The emerging players have also kept their” powder dry” by adhering to their credit underwriting standards.

Investors such as Trevor Vietor Executive Director of Trammell Crow Equity Fund 6 are finding yields and sponsors are heading their way. Making it more difficult for Mr. Vietor is the fact that many of the bridge lenders he has worked with in the past are on the sidelines. They want him to call them ‘after things settle down’.

Bridge lenders that are still in the market are seeing their yields rise and while the risk profiles of the transactions become more conservative since fewer bridge lenders are “in the market’.

Where do we go from here? The loan officers at the bridge lenders will need to put out their dollars. The groups that own the bridge lenders will soon start pressing them to reenter the market. We will find equilibrium soon…but the go go turbocharged days of the 95% loan to value bridge loan may be a thing of the past…’till next time.