Bridge loans work when the exit is planned first

A bridge loan is short term financing, usually one to three years, used to get a property or business from where it is today to where a permanent lender will finance it. Used well, it creates value. Used without a plan, it creates a maturity problem.

When a bridge loan makes sense

• Lease up. The property is not yet stabilized, so a permanent lender will not size to today's income.
• Renovation or repositioning. The business plan adds value that will show up in income over the next 12 to 24 months.
• Speed. An acquisition has to close faster than a bank or agency lender can move.
• A gap in time. A sale, a refinance, or a capital event is coming, and the borrower needs capital until it arrives.

What it costs

Bridge capital is priced for flexibility and risk. Expect higher interest rates than permanent debt, origination and exit fees, interest reserves, and sometimes extension fees. Many bridge loans are interest only and may fund renovation costs in draws as work is completed.

The cost is worth it when the value created is larger. The way to know is to model the exit before you close.

Plan the exit first

Before signing a bridge term sheet, answer four questions:

1. What will the property look like at stabilization? Occupancy, rents, and expenses, built from comparables and a real budget, not a best case.
2. What will a permanent lender lend on that? Run DSCR, LTV, and debt yield at a conservative rate. If the permanent loan does not repay the bridge with room to spare, the plan has a hole.
3. How long will it really take? Add time for permits, contractors, and lease up. Then make sure the bridge term and extensions cover it.
4. What happens if it takes longer or costs more? Know the extension terms, the reserves available, and where additional equity would come from.

Common mistakes

• Choosing the bridge lender on rate alone and ignoring extension terms.
• Underfunding the renovation or interest reserves.
• Assuming today's permanent loan terms will be available at the exit.
• Waiting until the last six months to start the refinance.

Where we help

We build the exit model first, then place the bridge loan with a lender whose terms fit the plan. When the property is ready, we place the permanent financing. If you are weighing a bridge loan, start a conversation or test the permanent loan with our Debt Sizing Calculator.