A bridge loan is a short-term, floating-rate loan used to finance a commercial real estate property or business plan that does not yet qualify for permanent financing. The property may be in lease-up, undergoing repositioning or renovation, transitioning from construction to stabilized operations, or simply acquired at a price and loan basis that a permanent lender would not yet underwrite. The bridge loan finances the gap between the current unqualified state and a future stabilized state where permanent debt — CMBS, life company, agency, or bank term loan — becomes available. Bridge terms typically run one to three years with extension options, and the loan is underwritten against the projected stabilized value and NOI rather than current performance.
Pricing and structure reflect the transitional risk. Bridge loans price at a spread over the Secured Overnight Financing Rate, currently the floating benchmark following LIBOR's retirement, typically 250-500 basis points depending on leverage, property type, sponsor quality, and the complexity of the business plan. Most bridge structures include an initial term of one or two years plus one or two twelve-month extension options, each exercisable by the borrower upon satisfying pre-negotiated tests — minimum occupancy, minimum DSCR on the extended term, no existing default. Interest reserves are commonly funded at closing from the loan proceeds to cover projected debt service during the lease-up period when the property is not yet generating enough income to cover the debt, allowing the borrower to service the loan without needing to inject equity from outside the property.
Exit risk is the dominant risk in bridge lending, for both borrower and lender. A bridge loan underwritten assuming a 30-month stabilization window is critically exposed if the business plan takes 42 months or if the permanent lending market has tightened when the borrower needs to refinance. Bridge lenders manage this risk through loan-to-value covenants tied to quarterly appraisals, cash management structures that sweep excess cash to a lender-controlled reserve, and recourse guarantees on specific performance milestones. Borrowers manage exit risk by stress-testing the refinancing: at what NOI and at what cap rate does the permanent loan they need to pay off the bridge still underwrite? Deals where the bridge payoff requires a cap rate 50 basis points tighter than the current market to refinance carry asymmetric exit risk that sophisticated lenders and borrowers both recognize.
Bridge loans are frequently confused with construction loans and mezzanine debt. Construction loans finance assets under construction with no income, with draws against completed work rather than a single advance. Bridge loans finance existing assets, even if those assets are partially vacant or underperforming. Mezzanine debt is not a standalone loan type based on asset status but a structural position in the capital stack — it sits behind a senior mortgage (which could be either a bridge loan or a permanent loan) and is secured by pledged equity interests rather than real property. In practice, a complex value-add project may layer all three: a construction loan during renovation, converting to a bridge loan during lease-up, with a mezzanine tranche sitting behind both the construction and bridge phases, eventually converting to permanent senior debt plus mezzanine at stabilization.
Open a learning-mode session biased toward this topic and closely related concepts. No timer, instant feedback after each answer, and a deeper explanation on any question you want to explore further.
Start the quiz →