Considering the alternatives:

Compared to the prospect of bringing in much more expensive equity partners, paying 12% for a year or so may not look so terrible, especially if the loan is structured to permit payments of interest only. Unless an equity source is also contributing considerable know-how and needed expertise, one may conclude that paying a higher interest rate for a finite period of time is far less of a burden to bear. Why give away a carried interest in your project unless you really need to do so?

Depending upon the scenario, some loans may include an interest reserve to help the owner/developer get through the non cash-flowing part of the project. Compared to the prospect of missing out on a well-priced opportunity that has significant upside once your business plan has been executed, once again, paying 12% or so for a year on an interest-only basis can seem downright thrifty.

Let's look at the Big Picture: In most cases a bridge loan is just the first part of a two-step financing process: (1) Bridge followed by (2) Permanent financing. While banks typically underwrite loans with a focus on the property's current cash flow and the borrower's credit profile, a private lender will consider the deal from a more comprehensive point of view, taking into consideration the market value of the property, the complexity (if applicable) of any construction that may be part of a developer's business plan, and of course, the borrower/developer's track record, level of experience, net worth and liquidity.

Time can be well spent during the Bridge phase setting up the Permanent phase of the project financing to succeed smoothly. During this phase, the more the owner/developer manages to accomplish (for example, lining up tenants if the project is a rental), the wider the array of low interest permanent financing choices that we will be able to bring to the table.

The private lender is (or should be) keenly aware of the risks and pitfalls of a project that they are considering, and must be ready to step into the breach if necessary to complete a project and get it to the point where it can be brought to market or begin to produce cash flow. Consequently the developer/investor may value the advice of the private lender who is often more entrepreneurial and "hands on" than the typical commercial banker.

© 2008. Gregg Winter. All Rights Reserved.
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