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What Is a Bridge Loan?
A bridge loan is a short-term commercial real estate loan, typically 6 to 36 months, designed for properties in transition. The name says it: the loan "bridges" the gap between the current situation (acquisition, renovation, lease-up) and the point where the property qualifies for permanent financing. Bridge loans are one of the most commonly used tools in commercial real estate for deals that don't fit neatly into conventional lending boxes.
When Bridge Loans Make Sense
Bridge loans fill a specific gap. Permanent lenders like CMBS conduits, Fannie Mae, and life companies want stabilized properties with proven income. If a property isn't there yet, a bridge loan covers the interim period. Common scenarios include:
- Value-add acquisitions: Buying a property that needs renovation before it can achieve market rents and qualify for permanent debt
- Lease-up: A recently completed or repositioned property that hasn't yet reached stabilized occupancy (typically 90%+)
- Quick close requirements: Competitive acquisitions where the seller needs to close in 15-30 days, faster than any permanent lender can underwrite
- Distressed acquisitions: Properties with deferred maintenance, below-market occupancy, or management issues that need hands-on improvement
- Refinance gap: When a maturing loan needs to be paid off but the property doesn't yet qualify for replacement permanent financing
Bridge Loan Terms
| Parameter | Typical Range |
|---|---|
| Term | 6 to 36 months (12-24 months most common) |
| Extensions | One or two 6-12 month extensions, usually with a fee (0.25-0.50%) |
| Interest Rate | 7% to 12%+ (floating, typically SOFR + spread) |
| Interest Structure | Interest-only (no principal amortization) |
| LTV | 65% to 80% of as-is value |
| LTC | 75% to 85% of total project cost (for value-add) |
| Origination Fee | 0.50% to 2.00% of loan amount |
| Prepayment | Usually open after a lockout period (3-6 months), or with a small fee |
| Recourse | Non-recourse available from larger lenders; smaller/private lenders often require recourse |
| Minimum Loan | $1 million+ (varies widely by lender) |
Who Makes Bridge Loans?
The bridge lending market has grown significantly over the past decade. Today's major bridge lender categories include:
Debt funds and private lenders: The largest segment. Firms like Arbor Realty, Ready Capital, Mesa West, and dozens of others operate dedicated bridge lending platforms. These lenders can close quickly and handle complex situations but charge higher rates than banks.
Banks and credit unions: Some commercial banks offer bridge programs, typically at lower rates (7-9%) but with more conservative underwriting, longer timelines, and recourse requirements. Bank bridge loans work well for sponsors with strong banking relationships and clean deals.
Hard money lenders: The fastest and most flexible, but also the most expensive. Hard money bridge lenders focus primarily on the property's value and the deal economics rather than the borrower's financial statements. Rates of 10-14% are common, with 1-3 points in origination fees.
Insurance companies and institutional lenders: A smaller segment. Some life companies and pension funds have bridge programs for larger deals ($10 million+), typically offering better rates for lower-leverage, lower-risk transitional properties.
Bridge Loan Sizing
Bridge lenders size loans using different metrics depending on the deal type:
Stabilized acquisitions (quick close): Sized primarily on as-is value. Lender applies their maximum LTV (typically 70-80%) to the purchase price or appraised value, whichever is lower.
Value-add deals: Sized on both LTC and LTV. The lender looks at the total project cost (purchase + renovation budget) and applies their LTC maximum (typically 75-85%). They also check that the loan doesn't exceed their LTV maximum against the as-is value. The more restrictive metric governs.
Unlike permanent lenders, bridge lenders are less focused on DSCR because the property may not be generating stabilized income yet. Instead, they want to see a clear business plan: what's the renovation scope, what rents will the property achieve post-renovation, and what does the exit (permanent financing or sale) look like?
The Exit Strategy Matters Most
Every bridge lender will ask the same question: how does this loan get paid off? The two most common exits are:
Permanent financing: Once the property stabilizes (renovations complete, occupancy at 90%+, income verified through 3-6 months of operating history), the borrower refinances into a permanent loan, a CMBS loan, agency debt (Fannie Mae, Freddie Mac), or a bank loan. This is the most common exit for multifamily value-add deals.
Sale: The borrower renovates, stabilizes, and sells the property. Common for fix-and-flip strategies and properties being repositioned for a specific buyer pool.
Bridge lenders underwrite the exit as carefully as the entry. If the stabilized property won't qualify for permanent financing at reasonable terms, the bridge lender may decline the deal or require more equity.
Bridge Loan vs. Permanent Loan
| Feature | Bridge Loan | Permanent Loan |
|---|---|---|
| Term | 6-36 months | 5-30 years |
| Rate | 7-12%+ (floating) | 5-8% (fixed or floating) |
| Amortization | Interest-only | 25-30 year amortization (typically) |
| Property condition | Transitional, value-add, lease-up | Stabilized, 90%+ occupied |
| Close timeline | 2-4 weeks | 45-90 days |
| Prepayment | Flexible | Defeasance, yield maintenance, or step-down |
| Renovation funding | Yes (holdback/draw structure) | No |
Renovation Holdbacks
For value-add deals, bridge lenders often fund renovation costs through a holdback structure. The lender commits to the full loan amount (acquisition + renovation) but holds the renovation portion in reserve. As the borrower completes renovation work, they submit draw requests with documentation (invoices, inspection reports), and the lender releases funds in stages.
This protects the lender from funding renovations that never happen. It also means the borrower may need additional working capital to front renovation costs before reimbursement, though some lenders will fund draws quickly enough that this isn't a major issue.
Risks and Considerations
Bridge loans carry specific risks that borrowers and brokers need to manage:
Rate risk: Most bridge loans float with SOFR or Prime. If rates rise during the loan term, debt service costs increase. Some lenders offer rate caps, sometimes required by the lender, which limit this exposure for a premium.
Extension risk: If the business plan takes longer than expected (renovations delayed, lease-up slower than projected), the borrower may need to extend. Extensions typically cost 0.25-0.50% of the loan balance and may require meeting certain performance milestones.
Exit risk: The biggest risk. If the property doesn't stabilize as planned and doesn't qualify for permanent financing, the borrower faces a potential maturity default. This is why bridge lenders scrutinize the business plan and exit strategy carefully.
Cost: All-in cost of a bridge loan (rate + origination fee + extension fees + exit fee if applicable) can be significant. On a 24-month bridge at 9% with 1 point origination, the total cost is roughly 19% of the loan amount. The value-add return needs to justify these costs.
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Try Janover Pro →Disclaimer: This glossary entry is for educational purposes only and does not constitute financial, legal, or investment advice. Bridge loan terms, rates, and requirements vary by lender, property type, and market conditions. Consult with a qualified commercial real estate professional for advice specific to your transaction.
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Try Janover Pro →This content is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. Janover Pro is a technology platform that connects commercial mortgage brokers with lenders. Janover Pro is not a lender and does not make lending decisions. Loan terms, rates, eligibility, and availability are determined by individual lenders and are subject to change without notice. Consult qualified financial and legal professionals before making financing decisions.
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