Bridge Loan UW

_Axelrod's picture
Rank: Orangutan | 356

Could anyone shed some light on Bridge loan UW? Trying to understand how these types of loans get underwritten from a funds perspective. Whereas typical lenders care more about in-place metrics I would think bridge funds are more focused the likelihood of future stabilized projections similar to someone in the equity seat of the stack.

Does anyone have an example of a bridge loan IC memo they could PM me by any chance?

Comments (8)

Feb 21, 2019

It's really just analyzing where the asset is, what stabilization looks like, what costs and challenges it will take to get there per the borrower's business plan, and then assessing how realistic it is given market conditions, and what different scenarios are where they don't meet their business plan to stabilize the asset. You look at different take-out lenders, how they underwrite loans, and make sure there are several lenders who will likely be happy to refinance your loan.

Mar 11, 2019

Agree that availability of takeout financing is key. That, and also your all-in basis. Important to know what your initial funding metrics are and make sure that as you fund more dollars you're also realizing more value creation. You don't want to be stuck in a position of fully funding your loan on a project that then stalls in midstream. In bridge lending it's quite possible to get comfortable in your UW -- especially since much of the funded dollars are funded into reserves controlled by the lender -- but lose sight that you will nevertheless need another lender to take you out. You really don't want to end up making a bridge to a bridge.

    • 1
Feb 21, 2019

When someones says 80% LTV for a bridge loan is that the value of the asset given the projected stabilization? Or more a core value for the property in an as is condition?

Feb 21, 2019
_Axelrod:

When someones says 80% LTV for a bridge loan is that the value of the asset given the projected stabilization? Or more a core value for the property in an as is condition?

it's looked at both ways, LTV of as-is and LTV of 'projected value'. If it's to get through entitlements it's LTV as-is, LTV of projected value, and LTV of by-right value

it's all about managing risk

Feb 21, 2019

Gotcha. So let's say you have an asset thats throwing of $1M of NOI and you have a sponsor (with a lot of experience) that with some base building work and unit renos can take the NOI to $1.4M after 4 years. Let's assume the market cap rate for a value-add deal is 6.0% and a core deal is 5.5%. The two main metrics would be DSCR and DY. Would a lender size to a 7.5% DY (200bps over the core market cap) on the $1M? or the $1.4M? Or is it a balance between? I would think the fund would want to underwrite to the $1M with the $1.4M being the "take-out" at 65% by a senior conduit loan.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Feb 21, 2019

Typically a bridge lender would size up using the take-out and cost basis. Many bridge lenders would allow for in-place DSCR to dip below 1.0 on heavier bridge deals.

In your case, since there is ample existing income, I can see a bridge lender quoting something like:
80% LTC, 1.00 in-place DSCR
65% LTV at stabilization, 1.25 DSCR based on a rate of 6% and a 25 year amortization

I would estimate 1pt in, .5pt out @ L+ 300-450

    • 1
Feb 23, 2019

When you say 1 point in and .5 out, are these origination and exit fees?

Feb 21, 2019
Comment