Bridge Lending Booms With Borrowers Banking On Better Times Ahead

The coronavirus pandemic set back many commercial real estate owners’ business plans, slowing down leasing, construction and foot traffic. But with vaccination rates climbing, travel returning and cities reopening, owners can see the light at the end of the tunnel. 

Optimism for the future of CRE assets is powering a boom in bridge lending. Borrowers who otherwise expected to move to permanent financing or refinance their assets are instead finding they need 24 months or more to complete their business plans. These borrowers have turned to bridge lenders to keep liquidity high while stabilizing their assets.

In these uncertain times, some large lenders have been pulling out of deals at the last minute or unexpectedly renegotiating loan terms, and borrowers have turned to bridge lenders for certainty in closing their loans.

“Lots of people in the finance industry like to talk about certainty when they give you a term sheet,” said Tom MacManus, president and CEO of Money360, a direct lender that has specialized in commercial real estate for over a decade. “But between the term sheet and closing, there is a lot of room for volatility. When we sign letters of intent, we do it with a lot of confidence, and we want borrowers to share in that confidence subject, of course, to no material adverse findings or surprises surfacing in the underwriting process.”

While other downturns have often forced CRE owners and developers to liquidate their stake in their projects, the pandemic has seen more owners holding onto their properties, waiting for demand to return and bid prices to rise. In a typical year, MacManus said, Money360 would have a run rate of around $600M. But this year, the firm is on track for over $1B in bridge and other forms of financing. 

“Most of the demand we’re seeing right now is for terms of two to three years, as owners need a little more time to perfect their business plans,” MacManus said. “Some properties still need to be stabilized, some developers are adding value, but they don’t quite qualify for perm financing or aren’t ready to sell yet. They know their properties can perform better than they are at the moment.”

The firm has loaned across a wide range of asset classes, from multifamily and industrial to medical office, manufactured housing and office. As the economy begins to turn a corner, MacManus said, Money360 is beginning to see more demand for retail and hospitality deals that were depressed during the pandemic, suggesting that more owners are now seeing the upside in hanging onto their assets in those sectors. 

For many deal sponsors, bridge financing fills a gap in the capital markets. The majority of Money360’s deals fall between $5M and $30M, amounts that are high for single-equity sources but small for an institutional lender. As banks and other large lenders have pared back their real estate exposure, MacManus said, Money360 has been taking on more large loans of between $20M and $40M.

As the economy revs back up, more borrowers have been negotiating prepayment provisions, allowing them to repay their loans early in case they can execute their business plans more quickly than they anticipated, and Money360 has become more flexible toward prepayment than in the past. 

For some borrowers, MacManus said, choosing a bridge loan right now is less about stabilizing an asset and more about waiting for the capital markets to stabilize and choosing the right moment to recapitalize their buildings. Even though interest rates are fairly low, disruption to the capital markets means that waiting could be a benefit to some asset classes. 

Other borrowers may choose a bridge loan to increase liquidity in their assets, to buy out a partner’s equity stake or switch out their equity partners.

The same boom powering demand for Money360 has been felt across the world of private lending and mezzanine debt, MacManus said. New, less experienced lenders with backgrounds in CMBS or private equity have been entering the bridge lending space for years, and the pandemic has only accelerated that trend. Money360 and its affiliates have been lending and/or investing in the commercial real estate industry for over a decade, and MacManus said Money360’s philosophy still sets it apart from the relative newcomers.

“Culture makes a big difference in this industry,” MacManus said. “We’re not here to grab every bit of extra yield or hold borrowers to unreasonable standards. We’re also not going to put our heads in the sand and take risks that don’t make sense. If the risk is tolerable, we’re going to find a way to make it work.”

This article was produced in collaboration between Studio B and Money360. Bisnow news staff was not involved in the production of this content.

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