A bridge loan is short-term commercial real estate financing, typically with an initial term of one to three years plus extension options, that bridges the gap between an acquisition or repositioning and permanent financing. Bridge loans are almost always floating-rate, priced at a spread over SOFR, and structured as interest-only during the initial term.
When is a bridge loan used?
A bridge loan is used when a property does not yet qualify for permanent or agency financing. The classic case is a value-add multifamily acquisition that needs renovation before it reaches stabilized occupancy and income. The bridge lender funds the business plan; the permanent lender takes out the bridge once the plan has worked.
Bridge lenders include debt funds, banks and specialty finance companies. They typically underwrite to the property’s projected performance rather than its in-place numbers, which is what makes the loan possible on an asset that a permanent lender would decline today.
The loan is floating-rate, priced at a spread over SOFR, and interest-only during the initial term. Because the rate floats, an interest rate cap is usually part of the structure, and it has to be kept current through every extension.
How do bridge loan extensions work?
Extension provisions, usually one or two 12-month options, are not automatic. Exercising one typically requires meeting minimum DSCR or debt yield thresholds, and it may require purchasing or extending an interest rate cap. With over 60% of bridge loans currently exercising extensions rather than refinancing into permanent debt, the extension mechanics matter as much as the initial term.
Illustrative example: a three-year initial term with two extension options.
| Period | Structure | Condition to continue |
|---|---|---|
| Years 1 to 3 | Initial term, floating rate, interest-only | None |
| Year 4 | First 12-month extension option | Meet the minimum DSCR or debt yield test; extend or replace the rate cap |
| Year 5 | Second 12-month extension option | Meet the test again; extend or replace the rate cap |
| End of year 5 | Final maturity | Refinance or sell |
What happens at bridge loan maturity?
A bridge loan that cannot be extended or refinanced at maturity becomes a maturity default, regardless of how the property is performing. Failing an extension test pulls the maturity date forward, so borrowers need to track extension test dates, cap expiration dates and the cost of replacement caps well in advance.
Bridge loans are the workhorse of transitional CRE strategies, and the refinancing risk they carry has to be actively managed. The exit, whether a permanent loan, an agency loan or a sale, is the whole point of the bridge, and the extension options only buy time to reach it.
How bridge loans show up in LoanBoss
LoanBoss tracks extension tests with notice reminders and the amortization and rate changes that apply during extension periods, along with hedge requirements, live cap mark-to-market and replacement cap costs. Good news money, forced funding dates and custom draws are carried into each loan’s cashflows, so extension dates and covenant tests across a bridge portfolio do not fall through the cracks.
Frequently Asked Questions
How long is a bridge loan?
The initial term is typically one to three years, with one or two 12-month extension options on top. The full potential term is the initial term plus every extension the borrower qualifies for.
Are bridge loans fixed or floating rate?
Almost always floating, priced at a spread over SOFR. Because the rate floats, extending the loan may require purchasing or extending an interest rate cap.
Do bridge loans amortize?
Bridge loans are structured as interest-only during the initial term, so principal is repaid at maturity through a refinance or sale rather than through scheduled payments.
What is a bridge loan extension test?
A minimum DSCR or debt yield threshold the property must meet before the lender allows an extension option to be exercised. Many extensions also require a new or extended interest rate cap. Failing the test leaves the original maturity date in place.
Who makes bridge loans?
Debt funds, banks and specialty finance companies. They underwrite to the property’s projected performance rather than its in-place numbers, which is why a bridge loan can fund a property that does not yet qualify for permanent or agency financing.
Related Terms
- Floating Rate
- Interest Rate Cap
- Interest-Only
- Maturity Date
- Construction Loan
- Bridge and Debt Fund Loans: Extension Tests, Notice Deadlines and What Trips Borrowers
- Hedge Requirements in Loan Documents: Replacement Caps, Swap Mark-to-Market and What Lenders Test
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary