Bridge Lending: Quick Capital for Developers

When properties are in distress, or builders are in default, traditional banks simply can’t provide the kind of financing needed to keep projects alive. Projects that are stalled or failed due to a lack of financing prohibit the revitalization of multi-family buildings, preventing the economic growth of surrounding communities. Investors, builders and developers stand to lose both existing investments and new opportunities when deals die because of the lengthy underwriting process that comes with traditional lending.

For the New England market, Wallace Capital provides a solution. As a bridge lender, the company specializes in short-term, non-traditional loans to local real estate investors, builders and developers. Robert Wallace, CEO – whose background is in institutional real estate and capital – founded the company fourteen years ago after seeing how under-capitalization can cause smaller investors, builders and developers to miss out on big opportunities.

“Small developers who are buying 3-family or 10-unit buildings and renovating them are very under-capitalized,” Wallace asserted. “The banks don’t always fit their needs. They can go to a local bank and try to obtain financing or a loan to buy a property, but sometimes the bank won’t lend enough or will pass on a certain deal for reasons such as a vacant property or a property that’s in poor condition.”

Wallace Capital initially provided lending to condominium developers, but has since evolved to include lending to investors, builders and developers specializing in foreclosures and in flip deals.
“These investors need financing that banks can’t provide,” Wallace said. “The banks can’t close quickly enough. If an investor is buying a property in foreclosure, they have 30 days or less to close. We can close that quickly.”

“Bridge lending is not a commodity product. It’s a specialized financing product. The bridge lender has to have the ability underwrite a property very quickly, maybe in days,” he said, explaining that Wallace Capital has the ability to access and underwrite the borrower, their balance sheet and ability to pay, as well as to appraise the property, obtain environmental reports and title in five to ten days.

Wallace added that, along with the time constraints, working with distressed properties presents a unique set of challenges that hinder the traditional bank underwriting process. When distressed properties are occupied by uncooperative tenants, for example, neither developers nor loan appraisers are able to access the property. “A bank won’t lend on a property they can’t get into. We would do that,” he said.

Besides lending for distressed property renovation deals requiring a fast close, Wallace Capital also gives developers an opportunity to buy their own debt back. During soft markets, like the recent recession, when a developer went into default on their bank loan, the bank would offer a buy-out settlement to be clear of the loan. “We would lend the money to the developer to buy that note back,” Wallace said.

Wallace noted, however, that rates for bridge loans are higher than traditional loans, so there needs to be a good reason for developers to use them. “This reason,” he explained, is usually because without bridge lending, the developer would otherwise lose or miss out on the deal altogether.

“Bridge lending is good for the local, quick, fast-moving developer who is buying opportunistically and who cannot find conventional financing,” Wallace said.

Because of the unique demands of bridge lending, companies that specialize in this type of financing tend to be small, local companies backed with capital from large investors. “We are a well-capitalized lender with long-term relationships with our investors,” Wallace said, adding that they are selective about the investors they work with and have maintained strong relationships with their current investor base for the past 14 years.

“We grow our investor base slowly and selectively, so we don’t have the volatility in capital under management that other groups have.”

According to Wallace, the multi-family real estate market is on an uptrend, which is attractive to developers and investors – and to bridge lenders. “It’s a hot real estate market. A lot of developers are buying, renovating and upgrading multi-family properties, and that is when you need bridge money,” he said.

Wallace also noted that lenders have again started lending at 100 percent of the cost a developer needs to capitalize a project, a scenario scarily reminiscent of the years leading up to the market crash of 2008.

With the current market being very liquid and conventional financing readily available, bridge lenders are becoming more aggressive. “If a bridge lender lends to a developer buying 200 apartment units, he can be very comfortable in knowing that once these units are renovated and rented, there will be a bank that’s going to take him out. Conventional financing is readily available for stabilized multi-family properties, and the rates are very low,” Wallace explained, adding, “They know they will be paid off when a property is stabilized.”

In the years following the recession, he said that a majority of loans were bank purchases and foreclosure deals. “During the Great Recession, most of our deals were distressed in some sort of way. We were the only capital available in the Great Recession for developers who were in default or having financial problems.”

In recent years, Wallace has seen a shift back to development deals focused on renovation and improvement. “The trend is moving from taking advantage of distressed properties to taking advantage of increased rents,” he explained.

For more information, visit: www.wallace-capital.com

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