Securing a commercial bridge loan can be a lot of work and any missteps can prove costly. Below are some tips, that if followed, will increase the probability of obtaining attractive bridge financing.
Have a Defined Plan
It is imperative to have a defined plan with an accompanying budget including a spreadsheet of monthly income and expenses for the first 24 months of the loan period. A lender’s ability to both understand and quantify the strategy quickly always works to the sponsor’s advantage. In particular, ensure that you are thorough in describing why this is a value-add opportunity.
For example, if poor management is to blame, talk through why they are a poor manager (limited experience, minimal properties under management, etc.). Additionally, any insight as to why the current ownership didn’t recognize or address this shortcoming is also helpful. A well-defined strategy, along with supporting details that paint a clear picture, will give significant credibility to the deal up front.
Understand the Timing Required
When looking to get a bridge loan, timing can be important, especially on an acquisition. In the bridge lending space, closing timeframes can run the gamut from a few days up to three months. Typically, the quicker the close, the more one will pay in terms of rate and points. Be sure that you select a lender that can meet your specific timing requirements. Keep in mind that once the deal is submitted to a lender, it can take a couple of days to a couple of weeks to get a quote. Then, once a quote is received, another week or two can pass before issuance of a term sheet. Understanding the lender’s typical approval/closing timeframes upfront will help avoid unpleasant surprises days before closing when time isn’t on anybody’s side.
An Organized Debt Package is Key
On any day, lenders are communicating with brokers throughout the country on a plethora of deals. As such, they see all types of presentations. The old saying “you never get a second chance to make a first impression” not only applies to dandruff but also to debt packages. Lenders see a lot of deals every day with limited time to determine which deals are the best fit. The first high-level review of the debt package can go a long way to solidify the opportunity in the lender’s pipeline and pull out the most aggressive pricing. The opposite is also true, a package that is difficult to follow, presents an unbaked or overly fluid business plan can reflect negatively on the desirability of the deal and attract less aggressive pricing. The ideal debt package provides a quick summary of the deal to give the lender a solid starting point and then goes into further detail regarding the business plan including: budgets, sources and uses, market research and sponsorship information. More information on best practices for debt packages is available here.
Provide Thorough Sponsorship Information
This is one of the more important aspects of any deal submission. For example, even as a non-recourse lender, we pay close attention to the sponsorship. Knowing the sponsor graduated from so and so, and “strives to provide investors the utmost care” is important, however, seeing recent transactions, ideally similar to the proposed opportunity, carries significantly more weight. The more recent the better. Some of our favorite sponsorship backgrounds have been outlines showing previous deals, when they were bought, for how much, CapEx budget, when sold, and resulting IRR. Additionally, understanding the equity structure, how much “skin in the game” the sponsor has and where the LPs (limited partners) are coming from (friends and family, a single shop, multiple small investors, etc.) is also important.
Always disclose any borrower blemishes (bankruptcies, foreclosures, DPOs, legal proceedings) up front. Be sensitive to this disclosure, even when it is just an oversight or forgotten amidst the multiple deal points discussed. If the lender comes across something that hasn’t been previously disclosed it will be seen as material and will cast a shadow on the entire deal, one that can be quite difficult to shake. Best case scenario, when something like this occurs (even when it was an honest oversight), underwriting will pin back their ears, working overtime to ensure nothing else is missed. Furthermore, it gives the lender grounds to re-trade (renegotiate) the deal - which isn’t a fun experience for anybody. In summary, be sure to disclose any blemish upfront.
Understand the Lender’s Approval Process
Questions to consider:
Who makes the final decisions? Who makes up committee? Which, if any, members of the committee have seen the deal or approved the provided quote? When is full approval received for a term sheet? An experienced broker can be a huge advantage in this regard, especially if they have worked with the lender on any prior deals.
Understand the Debt Quote Completely
Once a quote is received, go over it in detail, asking any questions no matter how small. This is a great opportunity to get a feel for how the lender operates and if there are any “gives” on quoted terms that the lender might accommodate.
If the Quote Makes Sense, Push for a Call with the Lender
In my experience, a call is almost always a net positive. The sponsor should try and make themselves available to jump on a call with the lender and thoughtfully walk through their background, the property, and the business plan. A sponsor that can speak to the specifics of the transaction typically comes off in a positive light.
Find a Good Broker
A good broker can provide a significant advantage. Aside from the benefits mentioned above, it is also important to note that lenders’ appetites can fluctuate from month to month and sometimes even week to week. Thus, there is a danger to sponsors who land a deal with one lender and then only go back to that lender without testing the market. This is where a good broker comes in. A good broker is in constant contact with a handful of lenders and will likely have a good touch on how hungry that lender is at that given time. For instance, a lender may have had a slow Q1 and needs to make it up over Q2. Or a lender may be over allocated in a certain area, product type or limited on their yearly allocation and therefore not quoting aggressively. Many factors, not necessarily directly connected to the property or sponsorship, can influence the debt terms offered. The debt landscape is ever-changing, so it is advantageous that, when looking for a loan, you have an advocate that is constantly taking the pulse of the market to find the best fit for that particular product at that particular time.
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