Bridge Loan
Also called: Bridge debt, Transitional loan
A bridge loan is short-term, usually floating-rate financing used to acquire and reposition a property that does not yet qualify for permanent debt, with the expectation of refinancing once the asset stabilizes.
Bridge debt exists because permanent lenders size to in-place income. A property with heavy vacancy, deferred maintenance, or rents far below market cannot support the loan its stabilized income would justify, so a bridge lender lends against the business plan instead, typically with a term of one to three years plus extension options.
The cost of that flexibility is real: higher spreads, floating rates that require a rate cap purchase, origination and exit fees, and a stabilization test that must be met to extend. The refinance at the end is an assumption, not a certainty, and bridge deals underwritten in a falling-rate environment and refinanced in a rising one are the canonical way multifamily equity gets impaired.
Rules of thumb
- Underwrite the rate cap cost as a real capital item and re-price it at each extension. Cap costs move violently with rates.
- Stress the refinance explicitly: test whether the stabilized property supports the takeout loan at an exit rate 150 to 200 basis points above today's.
Related terms
- Loan-to-Value (LTV)
Loan-to-value is the loan amount divided by the appraised value or purchase price of a property, expressed as a percentage, and it measures how much of the capital stack is debt.
- Debt Service Coverage Ratio (DSCR)
The debt service coverage ratio is net operating income divided by total annual debt service, and it measures how many times a property's income covers its loan payments.
- Value-Add
Value-add is an investment strategy that acquires a property with identifiable operational or physical upside and invests capital to raise its net operating income, increasing value beyond market appreciation.
- Yield on Cost
Yield on cost is stabilized net operating income divided by total project cost including acquisition and capital expenditures, measuring the unlevered yield a business plan produces once complete.