Value-add is the strategy that built most commercial portfolios: buy a property performing below its potential, fix what is holding it back, and refinance or sell at the stabilized value. The strategy is well understood. The financing is where most investors get stuck, because the very thing that makes the deal attractive makes it unbankable. Here is how the money works.
Why transitional property falls outside bank lending
A bank sizes a commercial loan on in-place income. It looks at the leases signed today, the net operating income those leases produce and the coverage that income provides against the proposed debt.
A value-add property, by definition, does not have that income yet. It is half leased, or leased below market, or physically tired, or carrying a tenant mix that needs changing. The income that justifies the price is in the future, and the bank cannot lend against the future.
There is a second problem. Value-add deals usually have a deadline. Sellers of underperforming assets are often motivated and the process moves quickly, which is the opposite of a bank’s timeline.
Private money solves both. It underwrites the property including what the plan will do to it, and it closes in days. Our commercial files close in 5 to 7 days, and as quickly as 3 days on low documentation.
How the bridge is structured
The shape is familiar from residential rehab lending, scaled up.
An advance at closing against today’s value buys the property. A holdback covers the capital improvements and the leasing costs, released in draws as the work is done. The loan is interest only, so the carry is the rate applied to funds drawn, and the balance is due at the exit.
Our bridge program covers this end of the market. It publishes rates from 9.00% to 13.00%, LTV up to 75% on residential and 70% on commercial, loans from $150,000 to $25,000,000 on business purpose files and terms of one or two years, with a 650 minimum credit score, across multifamily, office, industrial, retail, mixed use and SFR. The small balance, large balance and hard money commercial bridge structures all sit on those published terms, and they differ in the asset and the plan they are built around rather than in the numbers.
Those three products describe three different risk positions. Higher leverage comes with tighter credit and experience requirements, and the equity-led product trades leverage for flexibility on the borrower.
What the lender underwrites
Today’s value and today’s income. The starting point, from the rent roll, the leases and the expense picture.
The plan. Written scope, contractor bids, the leasing strategy, the schedule and the budget. A lender is asking whether this specific team can execute this specific plan.
The stabilized value. What the building is worth once the plan is done, supported by the income it will then produce and by comparable buildings in the same submarket. On commercial property this is an income calculation using a capitalization rate, not a sales comparison. Our post on how a lender values your property covers the approaches.
The market. Absorption, competing supply and what tenants are actually signing for nearby. Projected rents that nothing in the submarket achieves are the most common weak point in a value-add file.
The exit. Sale or refinance, tested against the numbers a takeout lender will use.
Planning the takeout before you buy
A value-add bridge is a two to three year instrument at most, and the refinance is the whole point. Run it before you commit.
Our commercial loan program publishes the stabilized side: rates from 7.90% private and 6.00% institutional, LTV up to 70% and terms of 1, 2, 3 and 15 years, from a 12-month bridge out to a 25-year amortization, qualified on the asset or on DSCR. The multi-family product covers 2 to 200 unit buildings in metropolitan areas with 250K+ population and stabilized properties with at least two units, and retail, office and industrial carries flexibility on rollover risk and month-to-month tenancy and single tenant or owner occupied considered case-by-case.
Read the word stabilized carefully. It is the condition the takeout requires and therefore the definition of done for your business plan. Take the projected stabilized value, apply the published cap, confirm the resulting loan repays the bridge in full, and check the projected income against the coverage the takeout requires. Our post on exit strategy covers testing both routes.
Property types and what changes
Multifamily. The most liquid and the most financeable. Unit by unit renovation and lease turnover is a well understood plan. See multi-family.
Mixed-use. Residential above retail. Financeable, with the commercial component getting more scrutiny than the residential. See mixed-use.
Retail. Tenancy is everything: who they are, how long they have left and how replaceable they are. See retail.
Office. Leasing cost is the line investors understate most, because tenant improvements and commissions are real capital. See office.
Industrial. Often the simplest physical plan, with location and clearance doing most of the work. See industrial and warehouse.
What to bring
The offering material, the rent roll, the leases, the trailing financials, your written business plan with budget and schedule, your own track record on comparable assets and your view of the stabilized value with the evidence behind it.
Bring it early. On a competitive commercial process, the investor who already has a lender reading the file is the one who can shorten the diligence period and win.
The commercial program page carries the published terms, the property types hub covers the asset classes and (619) 617-2797 or the borrow page opens a file.
