A commercial real estate bridge loan is a short-term, floating-rate mortgage (typically 1–3 years with extension options) used to finance properties that are not yet stabilized and therefore cannot access permanent financing. Bridge loans are the workhouse of value-add investing — allowing sponsors to acquire properties with occupancy issues, physical obsolescence, or lease rollover risk, execute their improvement plan, and ultimately refinance into a lower-cost permanent mortgage once stabilization is achieved.
Bridge loans are underwritten on two key questions: (1) Is the business plan for the property credible and executable in the expected timeframe? (2) If the business plan fails, what is the lender's recovery position? Underwriting requires projecting the property's income trajectory as vacancies are filled, rents are marked to market, and capital improvements are completed. The "as-stabilized" valuation — the projected value of the property once the business plan is executed — is a critical input for loan sizing.
Bridge loan LTVs are typically calculated against the current "as-is" value, not the projected as-stabilized value, and generally range from 65–80% depending on property type and sponsor quality. Additional proceeds — sometimes called "future funding" or "hold-back" amounts — are reserved for renovation costs or capital expenditures and are released as the borrower completes defined milestones. This structure ensures the lender's additional disbursements are tied to value creation.
Interest on bridge loans is typically floating rate — SOFR + 200–500 bps for quality assets, higher for distressed situations — reflecting the higher risk versus permanent financing. Many bridge loans include interest-only payments during the construction or renovation phase, with interest reserves funded from loan proceeds when the property cannot service debt from current income.
Exit strategies for bridge loans are critical to underwriting. The primary exit is refinancing into permanent financing once the property stabilizes. Secondary exits include sale of the property (with proceeds repaying the bridge loan) or equity recapitalization. Lenders assess the feasibility of each exit route and stress-test the exit under downside scenarios — what happens to the refinancing if interest rates rise or the market softens?