Short-term bridge financing offers 'spreads of 500 to 700 basis points'

Irrespective of which side of the short-term bridge loan you’re on, it is a critical component of investing.

According to Greg Vorwaller, president of Trez Capital, a private equity short-term bridge lender, investing in a pool of well-secured short-term bridge financing could yield premium returns.

“The average term is 18 months, compared to the two-year Canadian equivalent, and you get spreads of 500 to 700 basis points over,” he told CREW. “From a risk perspective, so long as the mortgages are well-underwritten and secured by good projects with exposure limited to no more than 75% of cost or value, then you have sufficient equity protection in the event of a downturn.”

Vorwaller added that investing in mortgages is leaps and bounds more sagacious than putting money into the bond market, despite it being more popular among investors.

“In many cases, you’re achieving premium returns over the equivalent of a high-yield bond,” said Vorwaller. “The difference between commercial mortgages and high-yield bonds is commercial mortgages are secure whereas many high-yield bonds are unsecured. I look at our investing as being safer than what you might find in an investment-grade, or slightly below investment-grade, corporate bond.”

Trez offers an open-end unit trust called Trez Capital Yield Trust, which invests in fully-secured commercial mortgages that generally have a first lien position in the 75% loan-to-value range.

“All those mortgages are underwritten and priced in the prime interest rates, and we look at that as a great hedge against future increases in interest rates, to the extent that it generates equivalent returns to investors,” said Vorwaller. “Their real returns are not otherwise affected given changes in inflation and, therefore, interest rates.”

Real estate investors should be well-acquainted with short-term bridge financing because, as their portfolios grow, they become necessities. In cities with hot real estate markets, like Montreal, Toronto and Vancouver, they’re bound to be sure bets.

“Bridge financing becomes important especially when  an investor wants to buy a property but somebody else is nipping at their heels who can come in with cash,” said Diane Bertolin, a mortgage agent with Unimor Capital Corporation in Burlington, Ontario. “Bridge financing can help out in that way, if they want to close a deal quickly.”

 

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