CMBS shops are using all their know-how in structuring fixed-rate CMBS conduit loans and applying this to bridge loans to capture attractive short-term investment yields and secure an opportunity to provide a fixed-rate CMBS conduit loan once the construction/renovation/repositioning period is complete.
“I have not pursued short-term lending opportunities historically as I struggled to understand the types of transactions that are suitable for bridge financing; the risk profile is so much greater than for a stabilized property,” said Kevin Monahan, Senior Loan Originator at ValueXpress for the eastern region of the United States. “But recently one of our investment bankers made it easy for me to understand. He said, ‘Kevin, any transaction greater than $10 million that would result in a fixed-rate CMBS loan after the business plan is executed that clears the bridge loan would be what we are after.’ ”
“Okay, I get that. I know what qualifies for fixed-rate CMBS financing since we do that all day long. Immediately what comes to mind is renovation and lease up of well-located commercial and retail properties, reflagging and PIP renovations for tired hotels in good locations, and ground-up construction for pre-leased or partially leased properties. I think I will simply begin with these opportunities,” said Monahan.
Not everyone qualifies for bridge financing despite having an opportunity that would result in a qualified fixed-rate CMBS loan. The project must be located in a strong, primary market and the sponsor must have substantial experience with similar projects. In addition, equity investment on the order of 30%-35% plus additional liquidity is required.