Commercial real estate investing in Utah demands a high degree of financial agility, especially in highly competitive areas like the Wasatch Front. Investors unwilling to wait for conventional lenders often turn to hard money lenders offering quick access to cash by way of bridge loans. The loans are perfect for meeting unique needs the banks will not touch. But they do come with certain risks.
Bridge loans offered by the best hard money lenders in Utah provide rapid, short-term capital ideal for completing acquisitions. According to Salt Lake City’s Actium Lending, hard money and bridge loans drive a significant portion of commercial real estate investing in Utah. But they do carry a distinct risk profile investors need to understand.
Needing More Time to Stabilize
Time is one of the primary advantages of hard money lending. It is advantageous in that lenders can approve and close in a matter of days. But there is another side to the time coin: the amount of time a borrower needs to stabilize a newly acquired property. This introduces the primary risk associated with bridge funding: time compression.
Bridge loans are short-term by nature. Ditto for hard-money loans. With terms typically in the 6-24-month range, bridge loan underwriting is based on the assumption that the borrower will stabilize the asset rather quickly. Stabilization could mean anything from completing office building improvements to hitting occupancy targets at a retail center.
Anything that slows down stabilization puts a borrower at risk of hitting loan maturity before the asset is ready for conventional financing. Supply chain friction, slow permitting, and even shortages of both materials and labor are typical culprits. An investor must find a way to extend the stabilization timeline if necessary.
Experiencing Exit Strategy Friction
Utah hard money loans are only approved when borrowers demonstrate reasonable exit strategies. But whether structured as traditional hard money or a bridge loan, a financing package is only as good as its exit strategy. So what if a borrower offers a strong exit but still experiences friction at loan maturity?
Actium says that most bridge loans are paid off in one of two ways:
- Conventional Financing – Once the acquired property is stabilized, the investor goes to a bank or credit union to arrange conventional financing. He is essentially refinancing the property with a long-term loan.
- Asset Sale – In some cases, a bridge loan acts as a financing tool to acquire a new property while an investor is trying to sell another property in his portfolio. The bridge loan is paid off when that secondary property eventually sells.
Slower-than-expected stabilization or a failure to sell a secondary property are common friction points for hard money borrowers. One way around the friction is to negotiate an extension of the original bridge loan. Fortunately, private lenders do not tend to be as rigid as their conventional counterparts. Because their goal is not to become landlords, they are sometimes willing to work through a bit of friction to help a borrower stay on track.
Think, Strategize, and Plan
There is no way to mitigate all the risk associated with Utah bridge and hard money loans. Navigating the associated risks is a three-step process:
- Think things through, being realistic about the risks.
- Come up with strategies for addressing risks if and when they arise.
- Put a plan in place to make good on the loan even if things do go wrong.
Bridge and hard money loans do not come without their risks. But by and large, they are safe financing tools used by property investors in Utah and across the U.S.
