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It is not entirely uncommon for a permanent loan submission to a lender to
"crash and burn" at the least convenient moment, i.e. to fall apart at some
final moment just prior to attaining a closing.
One temporary financial remedy to preserve the profit opportunity is
rapidly to patch together a short term bridge loan or an interim financing (say
for six months to two years) to facilitate a purchase on a stabilized property
or a value-add transaction.
(This loan would most typically be interest-only or with a minimal
amortization.)
(And the financing vehicle may also "buy time" to reposition the asset
until it is ready to access a market-rate permanent debt.)
In our experience, the interim loans through the unconventional lending
sources might prove to be very costly, bearing significant coupons and attendant
points "upfront" and/or upon the exit, but---after pausing, considering
the predicament, and then biting the bullet---might be found to be less costly
than bringing in an outside investor, or abandoning the entire undertaking
altogether.
It indeed might present a very difficult planning decision.
A compromise---one introducing a measure of borrower flexibility---is
either to structure a right to repay the short term bridge indebtedness when
desired, or to provide for the payment of a reasonable sum for the right to do
so.
Still yet another element introducing a borrower flexibility might come
through negotiating a permission to use a supplementary seller
financing---perhaps one secured only by an ownership interest----increasing the
debt's combined-loan-to-value and thus reducing the required borrower
equity.
Quite ironically, the prevailing terms of the bridge loan may be almost as
important as its overall high yield.
That is, somehow the higher yield on the bridge loan must be partially
compensated for---
i.e. by introducing more balancing measures of flexibility for the
borrower.
There are clearly a number of underlying, very fundamental issues
that must be openly addressed in structuring a bridge loan---to best serve the
borrower and his or her circumstances.
If you wish to discuss your transaction, please feel free to call Mr.
Margolin of Chilmark Associates Inc. at 203-353-0897.
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