Don Pelgrim headshot
Don Pelgrim

Although traditional bank and agency lending tends to dominate the financing discussion in senior living, short-term financing, or bridge lending, is a tool that every owner and operator should know about and have in the toolkit, especially in an environment of rising interest rates and credit restrictions.

A bridge loan is a unique tool. Think of it like a pipe wrench. You’re not going to use it every day, but when you have a leaky faucet, you need that special tool.

The right tools for the job make all the difference in the world, and ensuring that you have a diversified financial toolkit with resources at the ready is crucial to capitalizing on strategic business objectives. As counterintuitive as it may sound, permanent financing is not always the best tool for the job.

What is a bridge loan?

Bridge lending is short-term or interim financing that generally is used by a borrower until the borrower secures permanent financing or sells the underlying real estate. Bridge loans use a collateral-based lending approach, placing the greatest emphasis and weight on the cash flow and collateral value of the real property (such as an assisted living or continuing care retirement community). In contrast, traditional lenders will place the greatest emphasis on credit history and other factors. As the name implies, a bridge loan bridges you from point A to point B, spanning a gap in time or financing and creating a firmer foundation to receive traditional, long-term financing post-stabilization.

Loan benefits

Bridge lenders generally are not regulated the same way banks are, and as a result, are not subject to the market effects and underwriting restrictions that banks have. It also is important to note that the rules and regulations for banks ebb and flow with the economic tide. During an environment of economic uncertainty and anxiety about an impending recession, private, short-term capital sources fill the gaps that traditional lenders cannot. Further, those same economic conditions can affect how loans are funded on Wall Street. For example, when the Fed raises interest rates to stave off a recession, pricing a new mortgage-backed issuance is difficult and can put bond sales in limbo. Simultaneously, inflation may affect operating costs and capitalized rates. All of those factors affect the availability of capital and how easy or difficult it is to access.

On average, it takes a bank 120 days to close a transaction; bridge lenders make transactions happen in approximately 30 to 45 days. Although there is a premium for that speed, in the form of a higher interest rate, you gain a competitive advantage by using the flexibility of a bridge loan during a market where traditional capital is increasingly difficult to come by — and increasingly regulated.

What happens when you don’t fit traditional lending’s credit criteria? Or what happens when your transaction cannot afford to wait 120 days? Time is on your side with bridge loans.

Common ways to use bridge loans

Bridge loans are helpful in a variety of circumstances, including opportunistic and value-add acquisitions of nearby properties or complementary facilities (for instance, a stand-alone assisted living community acquires a neighboring facility). Likewise, an owner may be ready to retire and turn the operational reins over to someone else, requiring a cash-out refinance or locating a new owner.

In other circumstances, an operator of a longstanding community with minor wear and tear may choose to refresh and rebrand to regain a competitive edge in a marketplace saturated with competition and newer amenities. Another common example is the owner of an assisted living community who wants to tweak the building’s footprint to increase the number of memory care units.

Although the list of scenarios could go on, this is a sampling of ways in which senior living can leverage bridge loans to bolster occupancy, enhance amenities for residents and drive revenue.

Bridge loans aren’t the answer to every scenario, but neither is traditional bank financing. In scrutinizing an array of financial possibilities alongside existing market conditions, all owners and operators should assemble a diversified financial toolkit that features specialized and reliable options for pursuing short-term financing.

Don Pelgrim is the CEO of Wilshire Finance Partners, a real estate finance and investment company specializing in bridge loans and capital solutions for senior living and healthcare from $1 million to $10 million nationwide. Prior to joining Wilshire, he was a practicing attorney and held several executive positions in the banking and financial services industry. He has a juris doctorate from Loyola Law School of Los Angeles and an undergraduate degree in business administration from Hofstra University.

The opinions expressed in each McKnight’s Senior Living marketplace column are those of the author and are not necessarily those of McKnight’s Senior Living.

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