Bridge Loans

In a nutshell, bridge loans are short term financing "band aids" that will allow financing to bridge the gap between two long term loans. Bridge loans are not meant to be permanent solutions by any means, and typically are written for a maximum of 12 months.

So why would someone want a loan for such a short period of time?

In today's real estate market, there are many reasons for this. Perhaps one of the most common scenarios involves unfinished construction, particularly in the San Francisco area, making the need for San Francisco bridge loans to be readily available high.

Back when the real estate markets were humming along, money was easy to come by, real estate prices were soaring and developers were building like crazy. When a developer builds, typically there are a few steps involved. First is the land purchase. This purchase price is dictated in part by what can be built on the land, and how much that structure may be able to sell for once completed. As property values increased, the cost of land increased. Again, this is tied to the value of the finished product in a round about way.

Next comes the construction. This can be done in one or two phases, but the nuts and bolts of it are the same. The developer builds, and all of his assumptions with regards to the feasibility of the project come from the finished value of the property, or what it will be worth when the construction is complete. Many developers require financing to build, so a financial institution will lend construction funds, releasing the funds on a draw schedule, based on how much the property will be worth when complete.

Once complete, the developer will sell the property, with the buyer obtaining permanent financing. If the developer does not sell, he will refinance the construction loan with a permanent loan. Either way, the construction loan is meant to be refinanced and replaced with a longer term solution.

Depending on the project, the time it takes to get from step one to completion is usually measured in years. 1-3 years for most ground up construction projects is fairly typical. What this means, however, is that when the real estate market collapses, and a developer is in the middle of construction, you have financing issues.

The reason for this is in how everything is valued. Remember, the land is priced based on what can be built there, and how much it can sell for. If the final product declines in value by say 50%, that is going to have a major impact on the value of the land. By the same token, construction lending is based on the final project value as well. So when values decline and a developer is in the middle of these financing options, there may not be enough value in the finished product for financing to take place.

This was a regular happening over the past few years, with developers getting stuck with partially finished projects that they could not obtain financing for. Many of these projects ended up being taken back by the financial institutions and sold for pennies on the dollar. Financing for construction dried up almost completely as these types of loans invariably lost money for the banks. Instead of easy money for construction projects, you now have incomplete projects with no financing available.

As these projects get bought for pennies on the dollar, the new owners need some type of financing to bridge the gap from incomplete project to fully built project, as that is the only way they can get decent financing. This is where a bridge loan will come in. A bridge loan will lend short term money to complete a construction project, allowing a developer to finish construction and then obtain better financing. Many of these bridge loans are made by private investors, and are referred to as "hard money" loans.

However you designate these loans, though, there is a place for them in today's market. You can find more information about bridge loans here - San Francisco hard money.