Although traditional bank and agency lending tends to dominate the financing discussion in senior living, short-term financing, or bridging financing, is a tool every owner and operator should be aware of and have in their toolbox, especially in an environment of rising interest rates and credit constraints.
A bridging loan is a unique tool. Think of it like a pipe wrench. You won’t use it every day, but if you have a leaky faucet, you need this special tool.
Having the right tools for the job makes all the difference in the world, and ensuring you have a diversified financial toolkit with resources at your fingertips is critical to capitalizing on strategic business goals. As counterintuitive as it may sound, permanent funding isn’t always the best tool for the job.
What is a bridging loan?
Bridge lending is short-term or interim financing that is generally used by a borrower until the borrower secures permanent financing or sells the underlying property. Bridging loans use a collateral-based lending approach, placing the greatest emphasis and weight on the property’s cash flow and collateral value (eg. In contrast, traditional lenders place the greatest emphasis on creditworthiness and other factors. As the name suggests says, a bridging loan gets you from point A to point B, bridges a time or financial gap, and creates a more solid foundation to receive traditional, long-term financing after stabilization.
Loan Benefits
Bridge lenders are generally not regulated like banks and are therefore not subject to the market effects and underwriting restrictions that banks are subject to. It’s also important to note that banking rules and regulations ebb and flow with the economic tide. In an environment of economic uncertainty and fears of an impending recession, private, short-term sources of capital are filling the gaps that traditional lenders are unable to fill. In addition, the same economic conditions can affect the financing of credit on Wall Street. For example, if the Fed is raising interest rates to stave off a recession, pricing a new mortgage-backed issue is difficult and can stagger bond sales. At the same time, inflation can affect operating costs and capitalized interest. All of these factors affect the availability of capital and how easy or difficult it is to access it.
On average, it takes a bank 120 days to complete a transaction; Bridging lenders process transactions in about 30 to 45 days. Although there is a premium for this speed in the form of a higher interest rate, you gain a competitive edge by using the flexibility of a bridging loan in a market where traditional capital is becoming harder to come by – and increasingly regulated.
What happens if you don’t meet the credit criteria of traditional lending? Or what if your transaction can’t afford to wait 120 days? With bridging loans, time is on your side.
Common ways to use bridging loans
Bridging loans are helpful in a variety of situations, including opportunistic and value-added acquisitions of nearby real estate or complementary facilities (e.g., a self-contained assisted living community acquires a neighboring facility). Likewise, an owner may be willing to retire and hand over the operational reins to someone else, request a cash refinance, or find a new owner.
In other circumstances, an operator of a long-standing, low-wear community may opt for a refresh and rebrand to regain a competitive advantage in a market saturated with competition and newer amenities. Another common example is the owner of an assisted living community who wants to optimize the footprint of the building to increase the number of care units.
Although the list of scenarios could go on, these are a sampling of ways senior living can use bridging loans to boost occupancy, improve resident amenities and increase revenue.
Bridging loans aren’t the answer to every scenario, but neither is traditional bank financing. When examining a range of financial opportunities alongside existing market conditions, all owners and operators should assemble a diversified financial toolkit that offers specialized and reliable options for pursuing short-term financing.
Don Pelgrim is CEO of Wilshire Finance Partners, a real estate finance and investment firm specializing in bridging loans and capital solutions for retirement living and healthcare from $1 million to $10 million nationwide. Before joining Wilshire, he was a practicing attorney and held a number of senior positions in the banking and financial services industries. He holds a law doctorate from Loyola Law School in Los Angeles and a bachelor’s degree in business administration from Hofstra University.
The opinions expressed McKnight’s senior life Marketplace columns are those of the author and not necessarily those of McKnight’s senior life.
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