Commercial Property Loans and Bridge Loans for Value-Add Commercial Real Estate Opportunities
Value-add refers to the purchase of a building for the purpose of adding value. Value-add may come from lowering operational expenses and increasing revenue. It also may come from rehab and CapEx investments, or even repurposing a property altogether (think an extended-stay motel to a market-rate apartment complex). The end value can be in the form of increased net operating income, cap rate compression, or any number of items that ultimately lead to a short-term increase in value.
There are risks associated with a value-add property in commercial real estate. As with construction financing, value-add opportunities are pro-forma based. That means that it's all about what is projected to happen. Sometimes, the property is operating well enough that an investor can get a loan based on existing and historical operations. But sometimes, a higher LTC is required for investment into the property, which means greater risk to lenders. In the end, properties like that become the collateral for commercial bridge loans.
Generally speaking when an investor takes out a commercial bridge loan, it is an interest only loan that is based on LTC (vs LTV) because it requires additional investment (TI/LC, CapEx, Rehab, etc.). The goal of the bridge loan is to bridge the gap between the as-is use and value to stabilization at which point an investor can either (a) refinance the property, usually recouping a great deal of equity, with permanent long-term financing or; (b) sell the property at stabilization for maximum velocity of capital.