Private Commercial Loans and Bridge Financing: When They Make Sense
Banks and insured programs offer the lowest cost of capital, but they are not always available on your timeline or for your situation. Private lenders and bridge financing fill that gap. Used well, they let you close a deal you would otherwise lose. Used without a plan, they get expensive quickly.
What private and bridge loans are
Private commercial loans come from non-bank lenders: mortgage investment corporations, private funds and individual investors. They lend mainly on the property and the plan, with less weight on traditional ratios.
Bridge loans are short-term loans, typically one to two years, that carry a property from one stage to the next: from purchase to renovation, from construction to lease-up, or from one financing to another.
When they make sense
Speed: a time-sensitive acquisition that has to close before a bank or CMHC process can finish.
Value-add: a building with vacancies or deferred maintenance that doesn't yet meet conventional DSCR tests.
Transitions: the gap between construction completion and a stabilized take-out loan.
Complexity: mixed-use buildings, unusual assets or borrower situations that don't fit a bank's box.
Equity release: accessing equity quickly to fund another opportunity.
What they cost
Expect higher interest rates than bank financing, along with lender and broker fees, and often interest-only payments. Leverage is usually more conservative and is based on the property's value. Terms are short by design. The real question isn't whether private money costs more; it does. The question is whether the deal still works once you account for that cost over the time you will actually need the loan.
Plan the exit before you sign
A bridge loan is only as good as the exit behind it. Before you commit, map out:
What has to happen for the property to qualify for long-term financing: occupancy, rents, completed work.
Which lender or program will provide the take-out, and on what assumptions.
How long that realistically takes, with a buffer.
What it costs to extend if it takes longer, and whether the lender allows it.
In Quebec, also budget for the notary and registration costs of each new hypothec, since a bridge-then-refinance plan means two closings.
Red flags
No clear exit, or an exit that depends on rents the market doesn't support.
Terms shorter than the realistic business plan.
Fees or prepayment penalties that aren't clearly spelled out in the commitment letter.
WeFinanceU is an AMF-registered commercial mortgage brokerage in Montréal, focused on financing of $1,000,000 and more. When a private or bridge loan is the right tool, we match the file to suitable lenders from our network of over 20 lenders, and plan the take-out from day one. Talk to us about your deal.
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