Valuing a bridge loan company
Hi all,
I need help with the valuation of a bridge lending firm.
Bridge loan is a short-term loan offer (up to 12 months) to a potential RE buyer (either HNWI or a company). The purpose of the loan is to provide immediate liquidity for a client who wants to seize the opportunity while dealing with getting a mortgage which can take a lot of time.
I don't know how to approach to the valuation of such a firm. You can't value it as a bank and as a usual company either.
Any insights?
No idea how to value the entire company, but there are different types of bridge lenders. Also while your definition of a bridge loan is correct that is probably the least used scenario, especially for a HNW investor.
The reason is because these non bank bridge lenders usually offer non-recourse money and for their risk their interest rate they charge is between 6%-10% with a 6 month lock-out. So the investor would end up paying a 3%-5% premium on the property if he had to take out one of these bridge loans. Sometimes this doesn't matter but I can't image paying 5% extra on a property,
Most bridge lenders price these non recourse loans at such a high interest rate because they are non recourse and there is transitional risk from developing a piece of land or dilapidated property into a stabilized real estate asset. While most bridge lenders are not banks there are bridge lenders like CIT or even Life Companies that have a value add(read: bridge) platform. CIT or AIG/Pru also only lend to seasoned borrowers with HNW. But assume that the firm operates as a fund that has committed capital from investors and that get deployed whenever opportunity to invest gets found from the firms GPs/Operating Partners. I would assume that the cash flows for each fund(lets assume they only have 1 or 2 capital raises at a time that run coterminous with each other. Then I would expect the cash flows to if you have to estimated them flowing into the company in a standard distribution model starting from 6 months(because of the lock out period) and running 1-2 years.
Hope this helps in any way possible.
Hi, thanks for the reply. Actually, HNWI is not uncommon, in a particular case, those people account for about 90% of clients (bridge borrowers) and others are companies. Mostly, they take loans for property investments. The company does not lend to developers.
what you want to focus on is origination volume and fees earned by the origination platform.
Thanks! Yes, major revenues are interest income and fees. It is not a platform, it is just a company which gets capital from banks and lends it as a bridge to borrowers.
Although I lack case-specific experience in this matter, I would also consider on possible scenarios or probable outcomes in the industry. Given certain circumstances, for example, it is possible that default for an investor that utilizes such financing will be more cost-effective than paying it off (+ penalties, if it gets to that). Valuation of such a company based on past, current and expected performance will be extremely difficult, as there will be qualitative aspects that you should include in your analysis.
Hi Debtlift, thanks for reply! Agree with the scenarios, I am gonna do 3 scenario analysis to play around with my assumptions like best case, current case, worst case etc. But to get to that analysis, I need to find ways to value the company and it is on this valuation stage I stuck and trying to figure out how to approach it (except comps and transaction multiples).
As for the risks in such a business, it is an expensive loan which is made against the property the client is going to invest (1st lien), and with max. LTV about 60-70% and with properties being located in prime areas of NY. So client will lose the property if he/she defaults and it is not cost effective for them at all.
In case of default, the company easily sells the property and gets all money with margins back. Throughout the history of the business (about 15 years already), the company had only around 10 cases of defaults and all of them have successfully paid back the loan.
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