Bridge loans are commonly used for
real estate purchases as a way to
quickly close on a property. As its name implies, such loans act as a
“bridge” between times when financing
is needed. Typically, bridge loans are
paid back when a property is sold or
once long-term financing has been
secured.
While bridge loans are generally associated with real estate acquisitions, they
can also be used for other purposes.
“In addition to real estate transactions,
bridge loans can be used for other large
assets, such as airplanes and boats,”
says Glenn Hamburger, first vice president of Comerica Bank’s Western Market, Wealth & Institutional Management.
Smart Business gained more insight
into bridge loans from Hamburger to
learn more about how they are typically
used and when a 1031 Reverse Exchange makes sense.
How is a typical bridge loan structured?
A bridge loan is a loan or credit transaction used by borrowers to make an
acquisition of an asset with a quick turnaround. The term for a bridge loan can
be as short as a month and be up to 24
months. Usually, they are unsecured,
based on the strength of the borrower,
and the payments are interest only. A lot
of lenders are somewhat hesitant to provide bridge loans because the collateral
can be hard to value. Bridge loans are
one of our specialties, however.
What type of documentation is needed for
individuals who are interested in obtaining
a bridge loan?
We like to see personal financial statements, bank and brokerage statements,
personal and business tax returns from
the previous three years, along with any
type of documentation showing the
actual asset that is being purchased,
such as escrow documents.
Documents detailing the acquisition of
permanent financing should be included, as well.
Under what circumstances should a bridge
loan be used?
Bridge loans are typically used when a
borrower wants to acquire an asset and
wants to do so in a quick fashion. For
instance, when you are purchasing real
estate, it can take anywhere from 45 to
90 days to get permanent financing in
place. With a bridge loan this wait can
be ‘bridged’ by short-term financing.
When the real estate market heats up
again, we will have clients interested in
bridge financing to secure real estate
assets while they obtain permanent
financing, either through us or another
lender.
When should a company consider a 1031
Reverse Exchange?
An example of when a 1031 Reverse
Exchange would make sense is when
individuals or businesses find a property that they would like to acquire and
they have existing properties they
would like to liquidate. In order to avoid paying tax on the sale of their existing
properties, they would do a reverse
exchange and have their banker provide
them with a bridge loan to acquire the
new asset. Within the next six months,
they would market and sell the property
they already own and then those properties would pay off the bridge loan.
How does a 1031 Reverse Exchange differ
from a 1031 Forward Exchange?
With a 1031 Forward Exchange, you
would sell your existing property first
and then identify a new property within
a certain period of time. If you don’t find
a property to buy, you would have to
pay tax on the property you originally
sold.
With a 1031 Reverse Exchange, you
would need to have a 1031 accommodator buy the property for you through a
bridge loan. Then as you market and
sell the existing property that you are
going to exchange, the accommodator
would hold the property until the transaction occurs.
Can you provide a specific example of a
company that has benefited from utilizing a
bridge loan?
Last year, we had a client that wanted
to buy the office building next to his. He
wanted to close fairly quickly, within 30
days. We provided a bridge loan to him
so he could purchase the property and
our 1031 exchange department facilitated the purchase. He had six months to
sell two properties in his real estate
portfolio. When both properties were
sold, the funds paid off the bridge loan,
and he was able to take control of the
new property.
GLENN HAMBURGER is first vice president of Comerica Bank’s Western Market, Wealth & Institutional Management. Reach him at
[email protected] or (714) 435-3919.
