September 09, 2015
In the previous blog, I covered what hard money commercial lending is as well as how it is different from traditional lending.
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A hard money loan (which is often referred to as a bridge loan) is an non-bankable loan. A bank doesn’t want to do a hard money commercial loan because there is too much risk for a bank. A hard money lender is set up to do hard money loans. Much of the reason he can assume the risk is because he charges higher rates and terms.
In the previous blog, there were a number of loan situations written about that are good for a hard money commercial loan. A few of them are that the borrower has low credit scores, the property needs rehab, and the occupancy is low.
A very important point was made that because hard money commercial loans have quite a bit more risk than traditional lending, it’s wise not to get involved in one unless you have experience in ownership of commercial property involving a hard money commercial loan. Or, if you partner on the loan with someone who has such experience, that may greatly help mitigate the risk.
In this blog, a major important part of hard money commercial lending is written about – and that is the requirement of an exit strategy. Hard money loans require an exit strategy. An exit strategy is a strategy that has the hard money commercial loan convert into a permanent loan with a permanent loan lender. A typical commercial hard money loan is 1 to two years. A commercial permanent loan typically is 5 to 10 years.
The exit strategy causes the risk to the bridge lender to be greatly reduced because the bridge lender “passes the baton” – the bridge loan – to a permanent lender who sets up a permanent loan. The bridge lender is now free of the loan, and no longer carries the risk.
If there is no exit strategy, the bridge lender could be stuck with the property. A good – ethical bridge lender does not want to be stuck with the property. The bridge lender is not in the property ownership business and if he would end up getting the property, he could be in trouble financially.
Here is an example of how a hard money commercial loan converts into a permanent loan: An investor gets a hard money commercial loan to increase the occupancy in an apartment complex from 60% to at least 90%. A property with 60% occupancy is a distressed property that does not qualify for a permanent loan. A hard money loan acts as a bridge to finance the money needed to get the occupancy to the 90% or higher level at which point the occupancy can be stabilized. Once the property is stabilized, it can qualify for permanent financing.
Contact us to see if you qualify for our best multifamily, commercial, or bridge loan rates and terms. Keep in mind that one of our specialties is commercial bridge lending. Also, contact us if you would like to discuss your particular commercial lending needs, or if you have questions. Call 214-695-7310 or send an email to email@example.com
Bruce Painter, Director of Marketing, Business Loan Store