In general, debt financing involves raising money for business purposes in exchange for promised principal and interest payments. There are multiple types of debt financing available to commercial real estate and other business owners from a variety of lenders, including banks, pension funds, insurance companies, and other financial institutions. Each type of debt has its own function, terms, risk, cost and maturity. The job of the financing experts at Remington is to work with both sides of a commercial transaction to creatively mix and match these options with the interests of all the parties in ways that will secure the best possible rates and terms consistent with client needs and market conditions.
In the typical capital structure for commercial real estate, senior debt usually accounts for 50-70% of the capital stack. By definition, senior debt is just that. It is senior to equity and all other forms of mezzanine (junior, subordinated) debt. As such, senior debt stands first in line before all other creditors for interest and principal payments and, in the event of liquidation, the repayment of debt. Most senior debt on commercial real estate is amortized over 15 to 40 years, with interest rates, either fixed or floating. Rates tend to be based on the quality of the collateral involved and the property’s historic cash flow, with higher rates tied to the degree of risk involved.
Many commercial real estate loans mature in three to ten years, resulting in a balloon payment at the end of the term. Remington professionals are equally adept, however, at securing financing across the capital stack for virtually any business purpose, with or without the involvement of real estate, including loans for expansion, working capital, operating capital, investment capital, etc.
By and large, asset-based business loans have lower interest rates than unsecured loans and may be tied to the particular asset being purchased or other assets of the borrower.
Fixed Rate Loans: Fixed rate loans offer borrowers an unchanging rate of interest, with predictable payments for the life of the loan. Because of strong relationships with public and private sources of capital, many opportunities exist for the financing experts at Remington to negotiate with lenders on transaction terms for such loans, particularly interest rates, as well as maturity and prepayment penalties. All of which assures Remington clients of the best possible and lowest-cost financing package available.
Floating Rate Loans: Floating rate loans are typically tied to the London Interbank Offered Rate (LIBOR) – plus some point spread over the base rate. Attractive to borrowers with a two-to-four year financing requirement, floating rate loans are adjusted periodically, have minimum or no prepayment penalties, and cost less than fix rate loans because of the risk of rising interest rates. This type of loan has been particularly popular of late because of the historically low interest rates experienced in recent years. Remington professionals are highly experienced in securing such short-term financing or employing it as an integral part of a longer-term overall financing strategy.
Construction Loans: Commercial construction loans typically are short-term loans used to finance the cost of building new warehouses, industrial buildings, retail centers, apartment complexes or other properties destined to be sold or rented to others or operated by the owners. These loans tend to be varied, depending on the project, construction time, and borrower’s experience. They are meant to be paid off when construction is completed and a certificate of occupancy issued. Borrowers usually require another mortgage to pay off the construction loan when it comes due. Thus the overall process may entail two loan applications with their associated fees and closings – a potentially complex and time-consuming process that the experienced financing professionals at Remington can coordinate, facilitate and expedite. For more information on construction loans click here.
Bridge Loans: The bridge loan is a form of financing that “bridges” the gap between funds needed now and when longer-term financing becomes available. It can be a key component in an owner’s long-term financing strategy, particularly for those faced with a here-and-now opportunity or other situation, such as improving or selling a property.
Real estate owners often come to Remington to help secure a bridge loan to purchase a second property before the sale of the first property closes, with proceeds from the sale used to pay off the bridge loan. This illustrates the important “exit strategy” borrowers must have before an investor makes a bridge loan. In the foregoing example, the investor would need to see a signed sales agreement spelling out where, when, and how the bridge loan will be repaid.
Bridge financing almost always needs to be arranged and closed quickly. Such loans tend to be for 6 to 12 months with a possible 12-month extension. They are usually structured as simple interest only loans with no pre-payment penalty and all principal due in full at maturity. Risk to the investor is minimal since the loans are underwritten based on existing equity in the property and a defined exit strategy.
Because of the owner’s need for timeliness, banks and other institutional lenders are not usually effective when it comes to bridge loans. That is why the Capital Markets Group at Remington provides access to investors capable of making on-the-spot decisions. Included among these investors are hedge funds, private equity groups, mortgage pools and other sources of private capital. For information on hard money loans, another type of short-term loan, click here.
Hard Money Loans: There is another type of short-term loan that is similar to the bridge loan in some ways but substantially different in others. It is called the hard money loan. Hard money loans and bridge loans are similar in that both types can be quick to close. Both may be needed for a short period of time. And both undergo limited or less severe underwriting processes. But, while the bridge loan investor requires a definite exit strategy, the hard money source may not. Moreover, bridge loans frequently have a loan to value ratio of 70-95%, whereas hard money loans will not exceed 50% LTV.
Hard money loans also are generally more expensive. Unlike bridge loans, which focus on exit strategy, hard money investors emphasize collateral, making certain enough collateral exists to collect the debt in the event of default. Because the two types of loans have similarities, borrowers frequently misjudge which is best for them. More than three-fourths of those who say they want a bridge loan qualify only for a hard money loan because, for example, the borrower has less-than-average credit, a modest financial statement, too little experience in commercial real estate, or no defined exit strategy. The financing experts at Remington can quickly sort out any such confusion and quickly align the client with the appropriate type of financing and related investor.
About the author of this article:
Andy Bogdanoff is the Founder and Chairman of Remington Financial Group. Mr. Bogdanoff is an expert in commercial real estate and commercial debt financing with over 35 years experience.
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