Bridge Loans &amp; When to Refiance? Strategy Questions
The question is a little broad since I'm new at my real estate modeling job and not that knowledgeable about the topic of loans. But I pretty much guarantee there are nuances I should learn about and be aware of that I am not. Hoping you fine people would be able to give me a hand. (My boss came from the loan side of the business so I feel extra stupid asking him questions about it since it so basic to him and he is an all star genius anyway)

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So I'm told when you get a building vacant with all the units to be turned you get a bridge loan based on the debt yield of a later year (like year 3) instead of the current DCR  rate a loan would normally be based on if the building was not vacant. Cool. I want to ask why it based on Debt Yield instead of yr 3 DCR but that isn't hyper important. Brownie points if you know that answer. Or maybe he just messed up explaining it to me and meant DCR?

**PRIMARY QUESTION:**

How do you decide what year you decide to do the Refi? I think I understand it would be based on some metric of cash flow; maybe when you hit 90% of GPR or something that would give you a DCR for the loan/rate you want to Refi at. (Correct me if I'm wrong on that last part please) But what are the nuances and strategies here about the cost and timing of the Refi that someone with no experience like me should be aware of? There must be some I have not touched on at all. 

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To give you another basic question that shows how little I really know about this:

What stops you from doing a Refi every year based on your improved income until you gotten the property's cash flow where you wanted/projected was possible?

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[{"id": "ef70ha3", "text": "Looking at metrics such as DCR and DY for a bridge loan only matter so much if the loan your getting is for a property that is still cashflowing. You are correct in assuming that for a vacant building, a lender will look at metrics based on what your stabilized cashflow proforma is. \n\nYour first question regarding how long until you should refi is a good one. It comes down to how long it takes to executed your business plan. A full renovation of an apartment building takes time, because you arent just upgrading units, you are upgrading common areas as well. A standard expectation of build + stabilization for an apartment development is about 39-40 months. You would look to refi out of your construction loan around month 30-32 depending on how lease-up is going.\n\nA heavy value-add apartment deal will be looked at the same way from a bridge lender. They will price and size the loan to your stabilized cashflow. You have to understand because you have no cashflow during the renovation period, you will be running on an \"interest reserve.\" For a full reno play, I would be looking at least a 27 month time line. 18 months to reno, plus 9 months of lease-up in a decent market. That means I want a 2yr+1+1 or 3yr+1+1, loan. I will exit my bridge loan likely 3-6 months before stabilized so I save myself time and money, because the interest payments on a high-yield bridge loan are expensive. By refi-ing within just a few months of stabilization, I am able to show a perm lender that I am hitting the rents I wanted to achieve and at the same time I am exiting the bridge loan as soon as possible.\n\n&amp;#x200B;", "replies": [{"id": "ef724wx", "text": "Wow. Extremely awesome detailed answer! I could thank you until my fingers fell off from typing the words over and over. \n\nTo paraphrase what you said to makes sure I understood it; basically you want to Refi as soon as you can. Which you seemed to described as about 3-6 months before you reach stabilized /goal income. \n\nHowever because it takes so long to do the rehab and get the units mostly leased up you are looking at about a 2 year minimum with 3 years maybe being more common. \n\nOne last question though; what prevents you from doing Refi every year based on your steadily improving cash flow? I'm ignorant of the loan side in general. Is there a limit to how often you can Refi or is there a penalty for doing so too often or too early and what does that penalty look like?", "replies": [{"id": "ef73gbi", "text": "Generally, sponsors will look to bridge until stabilized cash flow and then sell or takeout the bridge loan with permanent financing (i.e., a commercial term loan/mortgage). You will get the best structure by waiting until the risk profile is close to or the same as a stabilized asset. If you go early, some perm. lenders will still finance the deal but require recourse, charge a higher rate upfront, ask for more covenants (e.g. DSCR remargin), and the like.\n\nRefinancing costs money and takes time. It generally takes 45-90 days to put a loan in place on commercial property. Plus you will pay for due diligence costs (appraisal, environmental, property condition reports) and underwriting fees/costs. If the lender isn't charging those, they're likely building them into the rate.", "replies": [{"id": "ef73nj7", "text": "Another awesomely detailed answer! Thank you both MORE than humble words do justice!", "replies": [], "depth": 4}, {"id": "ef7urqo", "text": "\\^This. I meant to answer the second question but had to run to a meeting. It takes a lot of time and money to put a commercial mortgage in place.\n\nSpend some time going over [adventuresincre.com](https://adventuresincre.com) , you'll pick up some good knowledge there.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ef8b22b", "text": "you base your refi scenario off of when the property stabilizes to maximize your IRR if you are a value-add and flip guy. Your first stabilized year is when your occupancy has reached market and you are no longer incurring significant capex. ", "replies": [], "depth": 1}, {"id": "ef9brum", "text": "I'll provide the quick answer to the smaller question: many bridge lenders underwrite to a stabilized Debt Yield, rather than to a stabilized DSCR, because it is easier to know. All you need to know to calculate debt yield is the NOI and the loan principal. But to calculate DSCR you need amortization and rate, which may not be easy to project a couple years out into the future.\nDebt Yield = Size\nDSCR = Size and Pricing", "replies": [], "depth": 1}]