Non-Recourse Bridge Loans for Commercial Real Estate
In Caddy Shack, Ted Knight has one last shot in order to beat the Chevy Chase/Rodney Dangerfield/Danny Noonan team and win a huge bet on the tournament. For this, he needs to pull out his secret weapon… the Billy Baroo putter! He hugs and kisses this putter. Clearly, this putter has brought him much success.
For the team at Banyan Commercial Capital, the non-recourse bridge loan is our Billy Baroo. We feel a personal connection to the product, and have a chemistry with it, that inspires the comparison to this scene in Caddy Shack.
We have worked through some of the most dramatic market swings in the southeast in the past decade. This has resulted in opportunities to purchase properties, remedy issues that resulted from a lack of capital invested by previous owners, and upgrade the income. We have closed loans where the properties were operating at market, yet there was ‘outside of the box’ thinking that created the buying opportunity to enhance the income, lower expenses, and increase value.
Generally with a non-recourse bridge, there is a need for funds other than just a portion of the purchase price. This is why we base the loan amount on Loan to Cost rather than Loan to Value. We have structured capital improvements, tenant improvements and leasing commissions, operating reserves, interest reserves, and earn-outs for funds beyond the regular good news events. This is the typical bridge scenario.
These loans are riskier.
- Cash flows can be interrupted
- there can be changes in the market during the rehab process
- contractor issues
- new competition
- cost overruns
We must convince a lender that they are betting on the right sponsor, right property, and right business plan, and market conditions that will cooperate. This is what we do, and we do it better than anyone else.
There is a new scenario for bridge loans today. Permanent markets, are not aligned with traditional borrower needs. CMBS pricing and execution is not what it was last year, life companies are more selective, etc. We are now working on bridge loans for stabilized properties. Often, clients are willing to purchase a property with a bridge and wait for the permanent markets to come back in line.
For multifamily, we have specialized in what we term “Rehab Lite”, meaning that the rehab budget is less than $5,000 per unit, and that the property will not have to be vacated during rehab. Vacant units are done first, followed by lease roll. We have leveraged these up to 85% of total cost, and have also structured earn-outs for post renovation. We do this because, in the worst case scenario, if permanent loan markets are not efficient, the sponsor can cash out while leaving the existing loan in place until the permanent market returns. Our mutual hope is that these funds are not accessed, rather the loan is refinanced with a long term fixed rate loan, with cash out.
Retail and office properties are different. Most of our bridge loans are directly resulting from a purchase opportunity in which the seller was not willing or potentially able to fund Tenant Improvements or Leasing Commissions, let alone capital improvements. We have seen this often when the seller was some sort of syndicated equity, and capital calls were not successful.
Hotels are even more interesting. Renewals of franchise agreements are generally tied to Property Improvement Plans. When the sponsor does not have the funds necessary to comply, we step in. We have become increasingly creative with advising clients on how to leave as many rooms online as possible, by renovating individual floors, one at a time, or sections of halls, using temporary doors and blockades, so the other guests are unaware of work. We work on the business plan with the sponsor to get the desired product. And yes, non-recourse is available.
Our value add lies in the fact that the non-recourse bridge lenders are generally not household names. These are people that we know well, and programs that we know well. We guarantee that you will be impressed with the result.