As Manager of a Private Mortgage Fund which makes Bridge and Mezzanine loans on commercial and investment real estate, I continually come in contact with individuals (in some cases potential borrowers, and in other cases potential Fund Investors) who are SHOCKED that anyone would EVER borrow at rates of 12% or 14%! It’s an interesting initial visceral reaction that usually dissipates when individual “does numbers” and quickly realizes that there is a huge difference between borrowing at a hefty rate for only 10 or 12 months vs., say, five or ten years. Further comprehension usually follows as individual ponders various factors that typically motivate Borrowers to seek a Bridge Loan such as an upcoming time-of–the–essence closing where a bank has yet to produce a commitment letter for one reason or another yet deal MUST close within, say, 10 days. Another typical reason is an individual having an opportunity to buy a property at a time when individual’s liquidity is limited, their cash flow is weak, or their credit scores are less than perfect, but they see a compelling upside strategy and have a clear plan and budget outlined to achieve it. We often provide Private Money for situations that, once stabilized, will easily qualify for bank financing.

Use right tool at right time:

Bridge loans are NOT intended to be utilized for a long period of time, and, of course, no one uses them as long-term permanent financing. The Bridge lender must be smart, nimble and FAST. The staff, legal counsel and appraisers of a private lender need to operate like a SWAT team; analyzing, underwriting, drafting loan documents and closing loan in very short order. The underlying quid pro quo for Private Money MUST be: “we’re expensive but we’re fast and dependable”. Expensive for a few months is also entirely different than expensive for 10 years. The fact is, that in today’s fast-moving real estate world, speed and certainty of execution are priority #1. It’s hard enough to find a property worth buying. Many sellers will not permit a mortgage contingency, and of course, market is swimming with 1031 tax-free exchange buyers who can buy all-cash or put down a significant down payment. Clearly, an all-cash buyer or a buyer armed with a financing commitment will usually be chosen over a buyer who insists on a conventional mortgage contingency. Often strategy must be: Find a worthwhile asset, tie it up, CLOSE on asset with temporary, fast, dependable financing, and THEN put perfect, low-rate financing in place once you control asset and have luxury of time to get it just right.

First hit target, then worry about getting a Bull’s Eye: