Discover the similarities and differences between these two commercial financing scenarios.

In the world of commercial real estate finance, many people use the terms "bridge lending" and "hard money lending" interchangeably. However, there are differences between the two types of financing and those differences can have a major impact on the way your loan is structured and how the approval process works.

Although both have likely been around since the dawn of lending, much of their relevance is rooted in the unique circumstances and explosive growth of American post-war expansion. In the years that followed, a variety of regulatory and economic shifts have created changes in both the availability and necessity of these types of private lending.

History of Commercial Bridge Lending

Bridge lending was originally used both in operational and real estate contexts as a way to free up needed equity and as a source of flexible funding for unexpected opportunities.

In the US, commercial bridge lending has had an impact on both the commercial and residential industries, freeing up equity for acquisitions and for a variety of other projects important to the development of communities and cities. Looser regulations in the 1980s and 1990s made banks more responsive to investors, decreasing the need for private lending options.

Subsequently, in the regulatory environment post-Dodd-Frank, the mortgage industry came under increased scrutiny and tighter lending guidelines and capitalization requirements were put in place to avoid a repeat of the mortgage meltdown of 2008. This created a space for private lenders who could make more capital available for a variety of uses to investors and developers.

History of Hard Money Lending

Hard money lending rose in popularity due to the unique economic climate of the post-World War II era and the demographic, economic, and residential changes that attended that time period. As builders and developers rushed to meet the unprecedented consumer demand of returning veterans and their growing families, they needed more options to allow them to build more residential and commercial spaces more quickly than ever before.

Rapid changes to the regulatory environment in the 1980s and 1990s led to a decline in hard money lending, but the 2008 mortgage crisis brought hard money lending back into the real estate finance space. As investors moved into real estate spaces to snap up bargains made available through foreclosure and bankruptcies, they needed sources of fast, flexible financing to take advantage of opportunities as they occurred.

Types of Commercial Bridge Loans

Commercial bridge loans are not one-size-fits-all products. There are different types of bridge loans for different types of projects, timelines, and purposes.

A core bridge loan provides interim financing for a term of a few months to a few years. Core bridge loans are interest-only and carry reasonable interest rates. Typically, a core bridge loan is available for products with an LTV of up to 65%, so secondary sources of funding may be required.

High-LTV Bridge

For projects with a higher LTV, a high-LTV bridge loan may be required. These are structured similar to a core bridge loan but are available for LTVs up to 80% with an attendant rise in the interest rate charged.

Mezzanine/Preferred Equity Bridge

These bridge loan types involve secondary or junior loans supplementing a more senior loan. Interest rates are higher on these types of bridge loans, but over time as equity builds in the project, they can be restructured to lower interest rate loans.

Mezzanine loans offer a mix of debt and equity that can be attractive to both lenders and borrowers. Interest on a mezzanine loan is tax-deductible, making it valuable to borrowers. Lenders can gain equity in a business or the option to purchase equity later, thus increasing return on investment and providing additional security. 

Preferred equity investments are similar to mezzanine loans, though the equity they provide is in the company rather than in a project. With accelerated repayment rights, an investor can take an active role in the company itself if needed in order to ensure repayment of the loan.

Similarities Between Commercial Bridge and Hard Money Loans

Commercial bridge loans and hard money loans share many common characteristics. These include the following:

• Both are considered temporary or short-term loans and will need to be refinanced if they are not repaid.
• Both generally carry higher interest rates than a traditional mortgage loan.
• Both are valuable for a variety of uses and are thus more flexible than traditional loan products.

What can you use commercial bridge and hard money loans for?

Either of these short-term loan products can be used for:

• Acquisition of a commercial property
• Carrying costs for a vacant commercial property
• Completion of tenant-requested improvements or alterations
• Payment of outstanding existing debt
• Renovation or rehab of a commercial property

Differences Between Commercial Bridge and Hard Money Loans

While they are used for many of the same purposes, there are some significant differences between these two types of short-term commercial loans. Among these are differences in the lender and borrower types they serve. 

Hard money loans are generally offered to those who have no other options and cannot qualify for a commercial loan. This may be because of risks presented by the project or property itself, the risk presented by the borrower, or the risks associated with a high LTV. Borrowers who have significant debt or an unattractive credit history, either due to foreclosures or bankruptcies in the recent past, are often unable to qualify for a more traditional loan. 

Hard money loans are often offered by individual investors or by small investment groups. The high potential rate of return and the speculative nature of the loans themselves can make them quite profitable. For the borrower, the ability to tailor the loan product to their individual requirements can make hard money loans an attractive option, although the higher cost and higher risk involved make hard money an option of last resort for most.

Commercial bridge loans are offered by well-funded institutional lenders with insight into the development and project management process. They are more focused on the selection of projects that are well-capitalized and well-managed with high ROI potential.

What is important when choosing a commercial bridge lender?

Just as with any loan option, you’ll want to consider the terms offered as well as the lender’s overall reputation for reliability and service. In addition, you will want to consider the following: 

• Turnaround: One of the primary reasons for choosing a private lender for your commercial bridge loan is in order to take advantage of a streamlined process and more immediate availability of funds. Because so much of the profitability of any project depends on carrying costs and timeline, fast turnaround and reliable funding ensures better outcomes.
• Penalties and incentives: Find out what fees, penalties, and incentives your private lender offers, including administrative fees and prepayment discounts and incentives. Because a commercial bridge loan is designed to be short-term, you will want to ensure that you are able to take advantage of alternative sources of funding should they become available without paying the full amount of interest for the original loan term.

Why does the market expertise of your commercial bridge lender matter?

One of the ways that private commercial lenders analyze investment opportunities is through understanding both the current investment climate and the performance of the subject property. By understanding why a property is not currently performing well -- whether due to the market or due to the way the space is being used -- an experienced commercial lender can better evaluate the proposal offered by the potential borrower and determine how likely it is to be successful.

In addition, an experienced lender can better diversify in order to manage risk and maintain a strong portfolio. By investing in a variety of markets and asset classes, as well as investing for a variety of purposes, an experienced lender can offer more value to the borrower and to his or her funding sources.

Takeaways

• Both commercial bridge loans and hard money loans rose in popularity in the post-WW2 era as a response to increased demand and a need for more responsive financing options.
• The 2008 US mortgage crisis helped to expand the use of bridge lending and hard money lending as a response to increased regulations and capital requirements for institutional lenders.
• Commercial bridge loans are available for a variety of projects, including those with high Loan-to-Value ratios and secondary loans to supplement existing primary financing.
• One of the best qualities of bridge loans and hard money loans is their flexibility. They can be used for acquisition, development, and carrying costs associated with a variety of development and construction projects.
• While commercial bridge loans share many common characteristics with hard money loans, borrowers are generally better-qualified and lenders are generally better monetized and more experienced.
• Timely turnarounds and a comparison of loan terms are important components of the due diligence required when evaluating your private lender.
• The expertise of commercial bridge loan providers results in better project evaluation and greater financial strength through diversification and successful project oversight.