Bridge Loan (Real Estate)
A bridge loan in real estate is short-term financing used to bridge the gap between a property's current state and a future financing event — such as stabilization, sale, or refinancing into permanent debt — typically featuring floating interest rates, interest-only payments, and terms of one to three years.
The bridge loan is the workhorse of transitional real estate financing in the United States. It provides capital during periods when a property does not yet qualify for permanent mortgage financing — perhaps because occupancy is too low, a renovation is underway, or a sponsor needs to close quickly before permanent financing can be arranged. The bridge loan fills that temporal gap, hence its name, while the sponsor executes a defined business plan.
Bridge loans are most commonly used in value-add real estate strategies where a sponsor acquires an underperforming property, implements improvements to boost occupancy and NOI, and then refinances into a permanent loan or sells the stabilized asset. A multifamily bridge loan might finance the acquisition and renovation of an apartment complex, with the lender underwriting based on both current in-place NOI and projected stabilized NOI after renovations are complete. The loan terms will typically include a conversion option or a clear path to a permanent loan takeout once stabilization thresholds are met.
Bridge loans are floating-rate instruments priced at spreads over SOFR, typically ranging from 150 to 350 basis points over the index for strong sponsors in primary markets, and wider for higher-risk deals in secondary markets. They are structured as interest-only during the bridge period, which maximizes cash flow flexibility while the business plan is being executed. Loan sizes often represent 65% to 80% of the as-stabilized value, with the loan amount supported by the lender's assessment of the stabilized property value rather than just the current distressed value.
The bridge lending market in the United States is served by a diverse mix of lenders: debt funds, specialty finance companies, mortgage REITs, commercial banks, and bridge-specific lending programs offered by agency lenders. The rise of non-bank bridge lenders — including publicly traded and private mortgage REITs — expanded the availability and terms of bridge financing significantly in the years leading up to the 2022-2023 interest rate cycle, though rising rates subsequently stressed some floating-rate bridge borrowers who had not purchased interest rate caps as required by their loan documents.
Extension options are a standard feature of well-structured bridge loans. A one-year extension option, exercisable upon satisfying certain performance benchmarks (minimum occupancy, minimum DSCR), gives the borrower flexibility if the business plan takes longer to execute than initially projected. Lenders require the purchase of interest rate caps on floating-rate bridge loans to protect against the risk of rising short-term rates, and the cost of those caps has become a significant line item in bridge loan underwriting since interest rate volatility increased sharply in 2022.