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Will a bridge loan work for your project's capital funding plan needs?
Surprisingly enough, the typical answer is a firm "no, it won't help,"
because bridge loans are based upon an underwriting of the borrower's credit
capacity, the revenues generated by the business on a routine basis and the
availability of collateral that is sufficient to retire the bridge loan in the
event of default.
The key to understanding the bridge loan underwriting process is to
understand that the lender is not an equity investor, but is providing you with
the sole opportunity of reducing your long-term at-risk capital contributions
and not providing equity sources you may not otherwise already have. In
this particular instance, the bridge loan is not suited for the capital funding
plans for use in the information-rich business environment of the 21st century.
In today's capital markets, it is not unusual to see a capital funding
plan with more than five (5) elements as a result of the application of
investment incentive entitlements as annuities that replace equity and/or
augment the equity contributions the developer would otherwise have to provide
as a condition precedent to commencing development of a commercial real estate
project. The key element in replacing the need for a bridge loan is to
understand how the investment incentives can be applied. In the case of
most commercial real estate development programs there are multiple incentives
available including:
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TIF Plans (not an incentive, but could be part of the structured
finance approach).
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CDD Plans (important potential capital that goes right into the
developer's pocket at completion of construction).
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Private Activity Bonds.
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State & Federal Grants/No-Interest Loans.
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Tax Credits.
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Bonus Depreciation Expense Allowance.
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Direct Federal Loans.
Make your next project work for you by inculcating the incentives from the
beginning in a way that doesn't create a massive equity dilution of your
interests.
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