Pay Rate for Commercial Real Estate Bridge Loans

If you’re seeking a bridge loan for a commercial property purchase or refinance, a unique payment structure called Pay Rate (aka Payment Rate) could reduce the monthly interest payments by almost half. In this article, we’ll explain how the pay rate structure works, the typical pricing, and how to find lenders that offer this unique payment structure for bridge loans.

This topic is only relevant to short-term bridge loans with a minimum loan amount of $1,000,000. There may be some lenders out there that will consider a payment rate structure for residential investment properties, but we’ve only seen it offered for commercial properties, including multifamily, office, retail and industrial.

If you get a short-term bridge loan for a commercial property purchase or refinance, your interest rate will likely range from 8% to 10%, and you’d have to make monthly interest payments during the loan term. But with a pay rate structure, the private lender would allow you to pay a lower interest payment during the loan term, and the remainder would be due when you pay off the loan.

Example Pay Rate Scenario

If your bridge loan amount is $4,800,000 and the interest rate is 10%, your monthly payment would be $40,000. With a pay rate option, the interest may be cut down to 5% during the loan term, so your monthly payment would be $20,000. The $20,000 per month difference would be deferred to when you pay off the loan by refinancing or selling the property. With or without the pay rate, the total interest due for the 12-month term is $480,000.

Not having to make those extra monthly payments during the loan term could be a huge benefit for the property investor. The pay rate option is mostly beneficial in cases where the property’s income is not enough to service the debt.

It could be a property which has significant vacancy, but the plan is to lease up and then refinance with a long-term conventional loan. Or if your commercial property is vacant and not generating any income at all, but it’s on the market for sale.

Even if the property generates more than enough cash to service the high debt payments, most property investors would likely prefer to reduce the monthly interest payments and keep the extra cash on hand.

The pay rate is not always half of the total interest rate. There is no set standard in the industry. Every lender that offers the pay rate structure will have a minimum amount of interest they have to collect during the loan term.

Although most CRE bridge loans range from 8 to 10 percent, we’ve seen a number of lenders go down to 6 or 7 percent. However, you likely won’t find a lender offering the pay rate option when the total interest rate is less than 8 percent.

Here are a few sample structures for a $4,800,000 loan amount with a 12-month loan term:

  • 10% Interest Rate = $480,000
    • 6.5% Pay Rate = $312,000
    • Monthly Payments: $26,000 instead of $40,000
    • $168,000 due at loan payoff
  • 9% Interest Rate = $432,000
    • 6% Pay Rate = $288,000
    • Monthly Payments: $24,000 instead of $36,000
    • $144,000 due at loan payoff
  • 8.5% Interest Rate = $408,000
    • 5% Pay Rate = $240,000
    • Monthly Payments: $20,000 instead of $34,000
    • $168,000 due at loan payoff
  • 8% Interest Rate – $384,000
    • 4.5% Pay Rate = $216,000
    • Monthly Payments: $18,000 instead of $32,000
    • $168,000 due at loan payoff

In addition to the interest rate, all lenders charge an origination fee which typically ranges from one to two and a half points. The maximum loan-to-value for most bridge loans is 70% for a purchase and 65% for a refinance. The maximum term is typically twelve months, but it could go up to twenty four months.

Why Most Lenders Don’t Offer Pay Rate

The pay rate option in commercial real estate bridge lending is extremely rare. A very small number of lenders in the United States will consider it. Although it’s a great offering which could help lenders win more deals, it may not be possible due to the lender’s capital structure.

Most bridge lenders manage a private mortgage fund capitalized by many investors who expect to receive a monthly distribution. If most of the loans in the fund’s portfolio were pay rate structures, the monthly distributions would not be steady, and it just wouldn’t make sense for the investors because a consistent return is one of the main reasons people invest in mortgage funds.

Bridge lenders who don’t manage a fund are likely funding the loan from their balance sheet and then selling to the secondary market. It’s highly unlikely that any loan buyer would consider buying a loan with deferred interest payments, unless they are buying at a steep discount.

So there are only 2 capital scenarios in which a pay rate structure is possible for a lender to offer. Either they lend their own cash and don’t use any external capital sources, or the lender is backed by investors who don’t need consistent monthly income from the loans they fund.

This mainly includes family offices and ultra high net worth investors. For these types of capital providers, the trade-off to taking a lower monthly  interest payment is having their money parked in very conservative loans, secured by prime commercial properties, located in primary urban markets.

How to Find Lenders That Offer Pay Rate

You can find direct private/hard money lenders right here on our website, and we have a filter you can use to find lenders that offer the pay rate structure.

  1. Start at the Commercial Bridge Lenders page
  2. Type in a state or major metro area, and click SEARCH
  3. Click REFINE RESULTS in the Filters section
  5. Look for the Payment Structure field, and select Payment Rate
  6. Click APPLY
  7. View each lender’s profile to learn about their guidelines, background and more
  8. Click the green CONTACT button and reach out to the lender directly
May 23, 2021