COMMERCIAL INVESTMENT REAL ESTATE
16 November | December 2017
D
uring the Great Recession, cooling capital markets,
greater regulatory scrutiny, and tighter underwriting
for commercial mortgage-backed securities caused
more challenges for financing transitional assets. Even
as the economy has improved, CMBS markets have not adapted.
As a result, bridge lending has stepped in to fill the gaps. Since
its comeback, commercial real estate professionals will have more
opportunities to use capital from bridge loans to assist with clos-
ing deals. It is crucial to understand its nuances.
In recent years, major companies such as Teva Pharmaceuti-
cal Industries, Anthem, AbbVie, and Aetna have used bridge
loans for initial financing of significant acquisitions. When Teva
bought Allergan's generic business in 2015, it lined up $27 bil-
lion of debt to finance the $40.5 billion deal. Likewise, health
insurer Anthem borrowed $26.5 billion in bridge financing for
its $54.2 billion purchase of Cigna Corp. While biopharma-
ceutical company AbbVie secured an $18 billion bridge loan to
finance its $21 billion acquisition of Pharmacyclics, Aetna lined
up a $16.2 billion bridge loan to fund its $47 billion purchase of
smaller rival Humana.
Total U.S. loan volume reached $2 trillion in 2016, and many
of those loans started with bridge financing.
Intended as an interim step before securing permanent
financing, bridge loans typically range from two weeks to
three years. From the commercial real estate perspective, com-
pared to other financial products, bridge loans are monitored
at higher levels. In contrast, traditional CMBS loans are static
at inception and constrained by limitations from the Internal
Revenue Code.
Funding Obligations
For bridge loans, lenders impose hard cash management at origi-
nation. These cash management provisions feature cash traps
with complex debt-coverage ratio or debt yield tests that com-
mercial real estate professionals have to calculate.
To date, no consensus exists about how to perform these cal-
culations. To the extent that bridge loans feature future funding,
commercial real estate professionals should understand that a
cash trap's debt yield test may differ from the test related to a
future advance. WIN-Initiative/Getty
Images
INVESTMENT
A N A LYS I S
Bridge Loans Rising
Due to tougher regulations, bridge loans are in high demand
as a stop-gap measure.
by Geoffrey R. Maibohm and Robert J. Sullivan