September 26, 2016
Bridge loans are taken out by borrowers for a short period of time, generally six to 36 months, in order to finance a short-term project or provide capital for a new property. With construction and development costs rapidly rising, Connect Media spoke with Dekel Capital’s Founder and Managing Principal Shlomi Ronen on the use of bridge loans in today’s development environment, as well as the need for non-traditional lending sources.
Q. What is the role of bridge loans in many value-add renovation or redevelopment projects that are upcoming or already underway?
A. Depending on the extent of the renovation, you’d use bridge financing to finance a property repositioning. Usually, if the work requires significant amounts of construction and draws, often times, that leads into the realm of construction lending. When it’s a lighter renovation, lease-up or cosmetic, and can be done in a short period time, that’s when bridge financing comes into play.
For example, one of our current clients is acquiring a retail center that they are planning on redeveloping into a mixed use retail and multifamily project. We are arranging bridge financing for them to fund the acquisition and predevelopment costs to get them to a point where it’s ready for construction.
Q. How can non-traditional lenders drive projects forward in ways that banks cannot?
A. Since non-traditional lenders do not have the same regulatory constraints as banks, they can be more aggressive. When banks heavily lend in one sector, for example, right now with multifamily, regulators promote the need to diversify and restrict the bank’s risk exposure in that single sector. However, non-traditional lenders will continue to lend until they feel that they are no longer achieving a good risk adjusted return.
While banks are primarily senior lenders, non-traditional lenders can provide senior loans, mezzanine, participating loan, etc. and can participate in the upside of the asset granted they provide enough leverage.
Q. What are the advantages and disadvantages of non-traditional lenders, and how do we see bridge and construction market evolving in 2017?
A. Non-traditional lenders can be more aggressive than traditional banks and are able to provide higher leverage, availability for non-recourse financing, and the ability to close quicker than the typical 45-60 days it takes traditional bank lenders. Non-traditional lenders are, however, more expensive. But, the pricing is worth it for those borrowers who are focused on higher leverage and non-recourse financing.
Looking towards 2017, the increased regulatory stipulations traditional banks are facing will continue to impact leverage and push borrowers to less-regulated sources of capital to fill the gap. We, therefore, expect the private market to evolve with construction and bridge financing becoming more readily available, as non-traditional lenders continue to see a gap in the market and the opportunity to increase lending volume.
For comments, questions or concerns, please contact Daniella Soloway