What it is
A bridge loan finances a property that isn't ready for a permanent loan yet. The property might be under-occupied, mid-renovation, newly built and leasing up, or bought quickly before long-term financing could close. The bridge loan covers the gap, and the borrower repays it by refinancing or selling once the property stabilizes.
How bridge loans are commonly structured
Structures vary by lender, but bridge loans often share these features:
- Short term. Commonly one to three years, often with one or two extension options subject to conditions.
- Floating rate. Priced as a spread over an index such as SOFR, frequently with a rate floor and a required interest rate cap.
- Interest-only payments.
- Future funding. Part of the loan held back to fund renovations or leasing costs as the plan progresses.
- Fees. Origination fees at closing and sometimes exit or extension fees.
Bridge lenders include debt funds, mortgage REITs, some banks, and private lenders.
What lenders underwrite
Because the property isn't stable yet, bridge lenders underwrite the business plan as much as the building.
| Question | What they look at |
|---|---|
| Is the starting point covered? | In-place NOI and debt yield, any interest reserve |
| Is the plan realistic? | Capital budget, timeline, rent comps, pro forma |
| Can the sponsor execute it? | Sponsor track record with similar plans |
| Does the exit work? | Stabilized NOI and value, and whether a permanent loan would size to repay the bridge |
Leverage is often expressed as a percentage of total cost (LTC) and of as-stabilized value.
Example
A sponsor buys a 184-unit apartment property at 82% occupancy with dated interiors. The plan: renovate units over 24 months, push rents and occupancy, then refinance. A bridge loan funds the acquisition plus the renovation budget, interest-only, floating over SOFR. At stabilization, an agency or bank permanent loan takes out the bridge.
The example is illustrative.
Common mistakes
- Not testing the exit. If stabilized NOI at a realistic exit cap rate doesn't support a takeout loan big enough to repay the bridge, the deal has a problem.
- Ignoring rate risk. Floating-rate debt can get expensive. Rate cap costs belong in the budget.
- Optimistic timelines. Renovations and lease-ups often take longer than planned. Extensions have conditions.
In the package
Lead with the business plan, show in-place and stabilized numbers side by side, and include the exit math. See how to package a commercial real estate loan for the full checklist.