Direct commercial bridge lenders occupy their own niche within the commercial mortgage industry, and as such have evolved to provide financing to a particular set of borrower, transaction and property types, which other types of lenders are unable to accommodate. In order to understand the role bridge loans play within the commercial financing market, a brief review of the different types of commercial lenders and their practices is helpful. The distinctions between the types of commercial lenders are less than clear at times, but we can generally split them into the following categories:
So-called "portfolio" lenders make commercial mortgages with the intention of retaining the generated asset as part of the company's portfolio. The two most common types of portfolio lenders are commercial banks and life insurance companies; but this category also includes such entities as pension funds, REITs, and credit unions. Portfolio lenders are currently a competitive source for commercial construction loans, SBA loans.
CMBS Conduit Lenders
Commercial mortgage-backed securities (CMBS) arose in the late '80s following the savings and loans crash as a way of enabling investors to participate in commercial mortgage lending within a managed context. Commercial mortgages that the conduit originates become part of a standardized pool of such assets, shares of which are then sold to investors. Thereafter, the conduit lender may service the loan, but the interest payments are collected on behalf of the investors. Conduit lenders are the main source for long-term financing for purchase and refinance of conventional commercial properties.
Private Investors and Funds
A more diverse and fluid category of commercial mortgage lenders is occupied by so-called "private" or "hard money" lenders. Generally the main distinctions between these lenders and the above "institutional" lenders are: (1) that the loaned funds generally derive from a private individual or a group of private individuals, rather than from a company's assets, and (2) that hard money lenders are willing to make loans with higher levels of risk in return for a higher return on the investment. However, there are now many self-described hard money lenders whose internal funding structure is quite similar to that of portfolio lenders, so the latter distinction is probably more crucial. Most bridge lenders fall into this latter category.
Conduit and portfolio lenders are focused on providing long-term purchase or refinance loans for well-qualified borrowers.
However, many commercial real estate transactions fail to adhere to the rather strict underwriting criteria required by these types of lenders.
Bridge lenders step into this gap to provide short-term loans for properties and/or borrowers that are transitioning to a state that will be acceptable to a conduit or portfolio lender.
"Institutional" lenders will tend to rely more on the operating history and income flow of a property to qualify a loan, whereas bridge lenders are willing to overlook income and operating irregularities, paying more attention to the market value of the real estate. For instance, a borrower desiring to purchase a property, the income structure of which is not yet acceptable to a long term lender, may seek a bridge loan to fund the acquisition, and hold this loan for two or three years while he rehabilitates the income flow of the property, so that he can at that time refinance through a commercial bank.