Commercial Bridge Loans:
How They Work and When to Use One
A bridge loan solves a timing problem: you need to move on a deal now, but the property doesn't yet qualify for permanent financing. This guide walks through the structure, the cost, and most importantly, the exit.
When a Bridge Loan Is the Right Tool
Bridge is not a last resort. For the right deal, it's the optimal first choice.
Below-Stabilization Acquisition
The property occupancy, income, or DSCR doesn't yet meet conventional lender thresholds. You're buying the future performance, not the current state. Bridge lends on the destination.
Value-Add Renovation
You're acquiring a property that needs significant renovation before it can be leased or re-leased at market rates. Bridge funds the acquisition; permanent financing follows stabilization.
Time-Sensitive Acquisition
The seller requires a fast close (auction, estate sale, distressed seller) that conventional commercial's 45-90 day timeline can't accommodate. Bridge closes in 7-21 days.
Lease-Up of New Construction
After construction is complete, a property may take 12-18 months to achieve stabilized occupancy. Bridge covers the lease-up period before the asset qualifies for agency or conventional permanent financing.
Repositioning / Change of Use
Converting a commercial property from one use to another (office to medical, retail to mixed-use) requires renovation and re-tenanting. Bridge covers the transition period.
Stabilized Property, Conventional Timeline Works
If the property is already stabilized, income-producing, and meets DSCR requirements, permanent conventional commercial financing is almost always cheaper. Don't use bridge when you don't need it.
Typical Commercial Bridge Loan Terms
Bridge terms vary significantly by lender type. Institutional bridge lenders offer lower rates with more underwriting requirements. Private lenders close faster with more flexibility.
| Term | Institutional Bridge | Private / Hard Money Bridge |
|---|---|---|
| Close Time | 14-21 days | 7-14 days (some 3-5 days) |
| Loan Term | 12-36 months, extensions available | 6-24 months, case-by-case extensions |
| Rate | 8-10%, floating or fixed | 10-13%, typically fixed |
| Points / Origination | 1-2 points | 2-3 points |
| LTV / LTC | 65-75% LTV or LTC | 60-70% LTV or 65% ARV |
| Interest Structure | Interest only or I/O + amortization | Interest only |
| DSCR Requirement | Often sub-1.0x OK (underwrite to ARV) | None required, asset-based |
| Recourse | Non-recourse available for experienced sponsors | Typically recourse |
| Prepayment | Often has minimum interest period | Flexible, some yield maintenance |
Bridge-to-Permanent: A Step-by-Step Example
The bridge loan is only half the deal. The exit to permanent financing is where the strategy succeeds or fails. Here is how a complete transaction flows.
Example Transaction
Value-add 16-unit apartment, Kern County. Acquired at 78% occupancy, below-market rents.
Bridge Acquisition (Month 0)
- Purchase price: $1,600,000 at 78% occupancy
- In-place DSCR: 0.96x (property does not cash-flow above debt service at current rents)
- Bridge loan: 70% LTV = $1,120,000 at 11% interest only
- Sponsor equity at close: $480,000 + closing costs
- Exit strategy identified: Freddie Mac Small Balance once 90%+ occupied at market rents
Stabilization (Months 1-10)
- Renew 12 units at market rents (14-22% above prior rents as leases expire)
- Renovate 4 vacant units to market condition and re-lease
- Month 8: 94% occupancy achieved, all rents at or above market
- Trailing 3-month operating statement supports $192,000 annualized NOI
- Monthly bridge cost: ~$10,267 (interest only). Covered by operating income.
Permanent Financing Exit (Month 11)
- Stabilized value (appraisal): $2,050,000
- Target: Freddie Mac Small Balance at 75% LTV = $1,537,500
- NOI: $192,000 → DSCR at target loan: 1.38x (above 1.25x threshold)
- Payoff bridge: $1,120,000
- Net cash out to sponsor: ~$380,000 (returns most of original equity)
- Permanent payment (7% / 30yr): ~$10,230/mo vs. $10,267/mo bridge (nearly neutral)
Where the Sponsor Lands
- Owns a stabilized 16-unit asset with $2,050,000 appraised value
- Permanent financing at 75% LTV — long-term, no maturity risk
- ~$380,000 returned to equity — most of the original capital recycled
- Ongoing cash flow from stabilized rents supports the permanent payment
- The bridge was the tool. The permanent loan is the outcome.
Planning Your Bridge Loan Exit Before You Close
The most common bridge loan mistake is closing without a clear exit plan. The exit should be identified before the bridge closes, not after the term expires.
Refinance to Permanent
The most common commercial bridge exit. Once the property reaches the performance thresholds required by the target permanent lender, refinance to a conventional commercial, agency, or DSCR product. Dan identifies the takeout lender at bridge origination.
Risk: Refinance risk: if rates rise materially during bridge term, permanent loan payment may be higher than planned.
Sell the Property
For fix-and-flip commercial and value-add investors, the exit is a sale after renovation and stabilization. Bridge carries the asset through renovation. The cap rate compression from distressed-to-stabilized creates the return.
Risk: Market risk: if cap rates expand or values decline during the bridge term, the sale price may not support the return.
DSCR Permanent (No Income Check)
For investors who don't want to document personal income, a 30-year DSCR product based entirely on property income is the exit. Requires the property to reach 1.0-1.25x DSCR at the new loan amount.
Risk: Rate risk: DSCR products often carry higher rates than agency or conventional commercial products.
A bridge loan without a clear exit is a problem deferred, not solved. I won't place a bridge loan without identifying the takeout lender and running the stabilized DSCR math first. If the property can't reach the takeout threshold within the bridge term with a realistic business plan, the bridge loan will fail at maturity — and that's a predictable outcome, not an unexpected one.
The bridge deals I see go wrong are almost always one of two things: the value-add timeline was underestimated (renovation takes 18 months, not 9), or the permanent financing underwriting was not checked before the bridge closed. The sponsor assumed the permanent lender would be there and discovered at month 11 that the terms didn't work. Structure the exit before you structure the bridge. That's the rule.
Bridge Loan FAQs
What is a commercial bridge loan?
What is the difference between a bridge loan and hard money?
How fast can a commercial bridge loan close?
What is the minimum DSCR for a bridge loan?
What are typical commercial bridge loan rates and fees?
How do I plan my exit from a bridge loan?
Bridge Loan and Commercial Financing Resources
Have a Deal That Needs Bridge Financing?
Dan structures bridge loans with the exit already planned. Call (661) 342-9381 or submit your deal details.