As appeared in the Miami Business Journal

Over the past three years, the real estate capital markets have been characterized by one word: volatility. Rising interest rates, increased credit spreads, and stricter lending standards from traditional banks have made it challenging to secure funding for property development and purchases.

However, there’s good news. The finance sector is beginning to find its “new normal,” especially compared to a couple of years ago. Investors have adjusted their pricing expectations, and lenders are no longer postponing debt maturities. Instead, they are collaborating with borrowers on solutions.

Some borrowers, facing imminent debt maturities, prefer to sell their commercial real estate (CRE) assets rather than refinance at potentially higher interest rates. Many of the office, industrial, and multifamily properties entering the market are newer, offering immediate cash flow and lower downside risk.

Buyers who seize these opportunities may find that the assets could benefit from some improvements to increase their value. This is where institutional bridge loans come into play.

Bridge Loan Explanations

An institutional bridge loan resembles a standard bridge loan for commercial real estate.  Both types of loans provide quick funding and are short-term, with the potential to be converted into permanent financing upon maturity.

However, institutional bridge lending is specifically designed to enhance newer, high-quality real estate assets through lease stabilization efforts or light value-add processes. This type of financing is particularly advantageous for tenant improvements and minor repairs, rather than major construction and rehabilitation projects. The primary objective of an institutional bridge loan is to upgrade an asset from Class B to Class A, or to elevate a Class B-minus property to a Class B-plus.

Additionally, the optimal range for institutional bridge loans is between $10 million and $75 million.

What Borrowers Should Know

Institutional bridge loans can be ideal for minor capital improvements aimed at enhancing occupancy and property values. However, obtaining such financing comes with multiple requirements, including the following.

#1—A Solid Business Plan

Most debt isn’t issued without a plan in place. Institutional bridge loans are no exception. The business plan must include specific details about how the funds will be utilized, a reasonable timeline, and the anticipated outcomes of the upgrade. This might include occupancy improvements, rent increases, or an increase in the property’s value.

At Revere Capital, we also require assurances that the sponsor has a solid track record to back them up. We prefer experienced owner-operators over those who are just starting out in the industry.

#2—Boots on the Ground

Some institutions and loan types don’t require the owner to be in the same place as the property they acquire. This isn’t the case with an institutional bridge loan. When sponsors apply for institutional bridge lending from Revere Capital, those sponsors must have knowledgeable personnel and local experts in place to ensure that property improvements adhere to the loan’s requirements and timelines. In other words, a California investor interested in buying and improving a multifamily asset in Kansas City must have boots on the ground to obtain institutional bridge financing.

#3—Skin in the Game

A sponsor is more likely to be approved for institutional bridge financing if they have personally invested their own money in the project. We like to see an equity stake of at least 10% from the borrower. This requirement also means that syndicates are unlikely to get approved for this type of debt. Syndicate owners generally don’t invest their own funds in such projects, meaning if something goes wrong, they walk away with few, if any, consequences.  

#4—Visits from the Lender

Those applying for institutional bridge loans from Revere Capital should expect to see us on their doorsteps before we approve their applications. Visiting the asset in person provides us with an idea of its current condition and how the sponsor plans to utilize the funds for improvement. It helps aid in making better funding decisions.

For example, a recent application to improve a Dallas property came across our desk. Everything looked great on paper, from the sponsor’s track record to the asset itself. But seeing the property in person changed our minds. The application was denied.

Funding the Upsides

Here’s where we are now:

• Bridge loans issued three to four years ago are maturing
• Interest rates began their rise in late 2022, making permanent financing more expensive
• As a result, owners choose to sell their properties, many of which are high-quality, newer assets
• Institutional bridge loans can help improve quality properties

As raising capital continues to be a challenge (and more investors sell their assets), institutional bridge loans can provide an ideal financing option to support and fund property upsides. This flexible and fast finance type lends itself nicely to improving occupancy, boosting property values, and increasing cash flow.