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@example.com or (714) 435-3919.