Bridge loan


A bridge loan is a type of short-term loan,
typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger
or longer-term financing. It is usually called a bridging loan in the
United Kingdom, also known as a “caveat loan,” and also known in some applications as a swing
loan. In South African usage, the term bridging
finance is more common, but is used in a more restricted sense than is common elsewhere. Description
A bridge loan is interim financing for an individual or business until permanent financing
or the next stage of financing is obtained. Money from the new financing is generally
used to “take out” the bridge loan, as well as other capitalization needs. Bridge loans are typically more expensive
than conventional financing, to compensate for the additional risk. Bridge loans typically have a higher interest
rate, points, and other costs that are amortized over a shorter period, and various fees and
other “sweeteners”. The lender also may require cross-collateralization
and a lower loan-to-value ratio. On the other hand they are typically arranged
quickly with relatively little documentation. In real estate
Use Bridge loans are often used for commercial
real estate purchases to quickly close on a property, retrieve real estate from foreclosure,
or take advantage of a short-term opportunity in order to secure long-term financing. Bridge loans on a property are typically paid
back when the property is sold, refinanced with a traditional lender, the borrower’s
creditworthiness improves, the property is improved or completed, or there is a specific
improvement or change that allows a permanent or subsequent round of mortgage financing
to occur. The timing issue may arise from project phases
with different cash needs and risk profiles as much as ability to secure funding. A bridge loan is similar to and overlaps with
a hard money loan. Both are non-standard loans obtained due to
short-term, or unusual, circumstances. The difference is that hard money refers to
the lending source, usually an individual, investment pool, or private company that is
not a bank in the business of making high risk, high interest loans, whereas a bridge
loan refers to the duration of the loan. Characteristics
For typical terms of up to 12 months 2–4 points may be charged. Loan-to-value ratios generally do not exceed
65% for commercial properties, or 80% for residential properties, based on appraised
value. A bridge loan may be closed, meaning it is
available for a predetermined timeframe, or open in that there is no fixed payoff date. A first charge bridging loan is generally
available at a higher LTV than a second charge bridging loan due to the lower level of risk
involved, many UK lenders will steer clear of second charge lending altogether. Lower LTV’s may also attract lower rates again
representing the lower level of underwriting risk although front-end fees, lenders legal
fees, and valuation payments may remain fixed. Examples
A bridge loan is often obtained by developers to carry a project while permit approval is
sought. Because there is no guarantee the project
will happen, the loan might be at a high interest rate and from a specialized lending source
that will accept the risk. Once the project is fully entitled, it becomes
eligible for loans from more conventional sources that are at lower-interest, for a
longer term, and in a greater amount. A construction loan would then be obtained
to take out the bridge loan and fund completion of the project. A consumer is purchasing a new residence and
plans to make a down payment with the proceeds from the sale of a currently owned home. The currently owned home will not close until
after the close of the new residence. A bridge loan allows the buyer to take equity
out of the current home and use it as down payment on the new residence, with the expectation
that the current home will close within a short time frame and the bridge loan will
be repaid. A bridging loan can be used by a business
to ensure continued smooth operation during a time when for example one senior partner
wishes to leave whilst another wishes to continue the business. The bridging loan could be made based on the
value of the company premises allowing funds to be raised via other sources for example
a management buy in. A property may be offered at a discount if
the purchaser can complete quickly with the discount offsetting the costs of the short
term bridging loan used to complete. In auction property purchases where the purchaser
has only 14–28 days to complete long term lending such as a buy to let mortgage may
not be viable in that time frame whereas a bridging loan would be. UK
The UK bridge loan market is not regulated by the Financial Conduct Authority so unlike
other sectors of the UK financial services, the Government do not produce statistics and
trade bodies make little official data available. In Corporate Finance
Bridge loans are used in venture capital and other corporate finance for several purposes:
To inject small amounts of cash to carry a company so that it does not run out of cash
between successive major private equity financings To carry distressed companies while searching
for an acquirer or larger investor As a final debt financing to carry the company
through the immediate period before an initial public offering or an acquisition. Example
In December 2010, Kohlberg Kravis Roberts and partners marketed a bridge loan for its
upcoming acquisition of Del Monte Foods. As is common in such cases, KKR planned for
the newly private company to borrow money by issuing corporate bonds. To ensure the money would be available, KKR
sought $1.6B in bridge loan guarantees, for which it promised to pay 8.75% interest for
60 days and 11.75% thereafter. At KKR’s option, these loans could then be
replaced with eight-year corporate bonds paying 11.75%. In return for the loans and guarantees, KKR
was offering roughly 2% in fees. South African Usage
In South African law immovable property is transferred via a system of registration in
public registries known as Deeds Offices. Given the delays resulting from the transfer
process, many participants in property transactions require access to funds which will otherwise
only become available on the day that the transaction is registered in the relevant
Deeds Office. Bridging finance companies provide finance
that creates a bridge between the participant’s immediate cash flow requirement and the eventual
entitlement to funds on registration in the Deeds Office. Bridging finance is typically not provided
by banks. Various forms of bridging finance are available,
depending on the participant in the property transaction that requires finance. Sellers of fixed property can bridge sales
proceeds, estate agents bridge estate agents’ commission, and mortgagors bridge the proceeds
of further or switch bonds. Bridging finance is also available to settle
outstanding property taxes or municipal accounts or to pay transfer duties. See also
Hard money lenders Commercial lenders
Non-conforming loan References
The KKR Way. Bloomberg Markets, August 2007
Del Monte Bridge Loan Termsheet. KKR and partners, December 2010
Investment firms agree $5.3bn Del Monte Foods acquisition. Food Navigator, November 30, 2010. Retrieved 2010-12-22
KKR Announcement KKR Retrieved 2010-12-22 Bridging loans to break £1bn barrier, West
One FT Advisor May 22, 2012 Buy to let demand fuels surge in UK bridging
loans PropertyWire February, 2012 Bridging loans increase 45pc due to new landlord
appetite The Telegraph October, 2011 Citations

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