A bridge loan is short-term, floating-rate debt from a debt fund, mortgage REIT or bank used to acquire or reposition a property before permanent financing, with a two- or three-year initial term plus one-year extension options that the borrower exercises only by passing tests, giving notice within a window, paying a fee and, usually, buying a new rate cap. The extension is the product. Sponsors who treat it as automatic discover, twelve months in, that the test they need to pass is the one the business plan has not yet delivered. This guide covers what a borrower has to track on a bridge or debt fund loan and how to keep a portfolio of them on schedule.
Why bridge loans are the most hands-on debt in a portfolio
Debt fund, mezzanine and preferred equity loans share a set of features that demand attention:
- Floating rate over SOFR with a floor, sometimes with different daycount and business day conventions from the rest of the portfolio.
- Future funding for capital expenditures, tenant improvements and leasing commissions, drawn against a budget with conditions.
- Extension options conditioned on financial tests, notice, fees and hedging.
- Cash management that springs on triggers.
- Rate cap requirements that reset at each extension.
- Recourse carve-outs and completion guaranties with burndown provisions.
Each is a date, a test or a dollar amount, and every one is in the loan agreement.
The extension in detail
Tests
Typical conditions: a minimum debt yield or DSCR on trailing financials, a maximum LTV based on a new appraisal, no default, and completion of a stated portion of the business plan. Debt yield thresholds commonly step up at each extension. Each test has a definition (which NOI, which period, which adjustments) that must be reproduced exactly. See DSCR and debt yield tests with lender-specific adjustments.
Notice
The borrower must deliver written notice within a window, often no earlier than 90 days and no later than 30 days before the current maturity. Miss the window and the option lapses regardless of the tests. This is the single most common bridge loan failure we see.
Fees and rate changes
Extension fees are a percentage of the outstanding balance. Spreads may step up in extension periods, and interest-only may convert to amortization. The cash flow projection has to reflect both.
Replacement cap
Extension typically requires a new rate cap covering the extended term, with a strike that often tightens. The cap’s cost at current volatility is part of the extension decision and needs a budget months ahead. See hedge requirements.
Good news money and forced funding
Future funding for leasing costs is released on conditions (“good news money”), and some loans require the borrower to fund shortfalls or reserves on specified dates. Both belong in the cash flow. See good-news money.
Tracking a bridge loan from closing
- Abstract the extension provisions as data: each test with its definition, the notice window as two dates, the fee, the spread and amortization changes, the cap requirement.
- Test continuously. Run the extension tests every month on live financials so the trajectory is visible a year out. If the debt yield test needs 8.5% and the property is at 7.2% with eighteen months to go, the business plan conversation happens now.
- Put the notice window on the calendar with alerts at 180, 120 and 90 days.
- Project the extended period with the new spread, amortization and cap cost, and compare with a refinancing.
- Track burndown. Recourse and completion guaranties often reduce on milestones. See recourse and guaranty burndown.
A worked example: the extension that needed eighteen months
A $36 million debt fund loan on a 240-unit value-add multifamily acquisition. Initial term 36 months, two twelve-month extensions. Extension one requires: debt yield of at least 8.0% on trailing three months annualized (lender definition: 5% vacancy floor, $300 per unit reserves, management fee at the greater of actual or 3%), no default, notice not earlier than 90 and not later than 30 days before maturity, a 0.25% fee, and a new cap through the extended term struck at 4.75%.
Month 18. Renovation is 60% complete. Trailing three-month NOI annualized, on the lender’s definition, is $2.6 million; debt yield is 7.2%. The business plan projects 8.4% at month 36. The platform’s monthly extension test shows the trajectory: at the current pace, the test passes in month 33, leaving a three-month margin.
Month 24. Two months of renovation delays. Debt yield is 7.6%; the projected pass date has moved to month 35. The margin is one month. The sponsor accelerates unit turns and holds a conversation with the lender about the test definition (the lender agrees to count executed leases commencing within 60 days).
Month 30. Debt yield 8.1%. The replacement cap is priced: $520,000 at current volatility for the extended term at 4.75%. Budgeted.
Month 33. Notice window opens at day 90 before maturity. Notice delivered on day 88 with the test evidence. Cap executed in month 35. Extension confirmed.
Illustrative example:
| Month | Debt yield (test: 8.0%) | Projected pass | Action |
|---|---|---|---|
| 18 | 7.2% | Month 33, three-month margin | Renovation 60% complete; monitor the monthly test |
| 24 | 7.6% | Month 35, one-month margin | Accelerate unit turns; lender agrees to count leases commencing within 60 days |
| 30 | 8.1% | Passed | Price and budget the $520,000 replacement cap |
| 33 | Test evidence delivered with notice | Notice window open | Deliver notice on day 88; execute the cap in month 35 |
The extension was never in doubt in the business plan. It was in doubt at month 24, and the sponsor knew because the test ran every month.
Common mistakes on bridge loans
- Running the extension test for the first time at the notice window. By then the only options are a waiver or a refinancing.
- Missing the notice window while passing the test. The most avoidable failure in the category.
- Budgeting the replacement cap at the original cost. Volatility moves; price it monthly.
- Forgetting the spread step-up and amortization change in the extension period. The cash flow projection has to reflect them.
- Tracking the senior and not the mezzanine. The intercreditor adds cure periods and standstills that affect both.
How this looks in LoanBoss
Bridge loans are abstracted with their indices, daycount conventions and business day adjustments. Extension testing runs against integrated financials with notice reminders, and amortization and rate changes during extension periods flow through the cash flows automatically. Hedge requirements carry live mark-to-market and replacement cap costs. Good news money and forced funding dates are tracked, and draws can be customized in the cash flow projection. Recourse and burndown are tracked per guaranty.
Frequently Asked Questions
What if we pass the tests but miss the notice window?
Under most documents the option is lost. Some lenders will grant the extension anyway, at a price. Do not rely on it.
Can extension tests be waived?
Lenders sometimes waive or modify a test for a fee or a paydown. The negotiation goes better when it starts six months out rather than six weeks.
How should we budget the replacement cap?
Price it at today’s volatility for the extended term and strike, and update monthly. Cap costs move sharply with rate expectations.
Does mezzanine debt have the same provisions?
Usually, layered on top of the senior loan’s, with an intercreditor agreement that adds cure rights and standstill periods. Track both loans and the intercreditor together.
When should the extension test first be run?
At closing, and every month after on live financials, so the trajectory is visible a year out. A sponsor who runs it for the first time at the notice window has only a waiver or a refinancing left as options.
Related reading
- Construction loan draw tracking
- Managing agency loans
- Loan critical date tracking
- Floating-rate re-amortization and SOFR tracking
- Bridge loan and interest rate cap in the glossary
- Origination fee in the glossary, with exit and extension fees compared
A bridge loan’s value is in the option, and the option is worth nothing after the notice window closes. LoanBoss tests extensions continuously and puts every deadline on the calendar.
Sources
- CRE Finance Council, transitional lending and debt fund market reports (2026)
- Mortgage Bankers Association, commercial and multifamily origination data, Q2 2026
- Public term sheets and loan documentation from debt fund lenders
- LoanBoss bridge loan documentation, loanboss.com