A bridge loan in commercial real estate is short-term financing that carries a building from its purchase or construction to the stable income a permanent lender needs. The US Office of the Comptroller of the Currency (OCC) supervises national banks and publishes the handbook its examiners use for commercial real estate loans. It says a bridge loan "provides short-term financing to allow newly constructed or acquired commercial properties to reach stabilization" (OCC handbook).
The same handbook says bridge loans "are usually written for a period of up to three years". They "allow for the lease-up and income stabilization necessary to enable either sale or qualification for permanent financing".
Stabilized occupancy is the level a building reaches once it has been on the market long enough. The OCC describes it as the occupancy "a property is expected to achieve after the property is exposed to the market for lease-up over a reasonable period of time".
Owners take a bridge loan when a building earns too little, or too unevenly, for a permanent loan:
- Buying a partly vacant building and leasing the empty space.
- Renovating an older property. The OCC describes a bank that finances "an underperforming property that the borrower intends to improve, typically by performing physical upgrades or curing deferred maintenance and improving the management".
- Filling a new building after construction. A construction loan can convert into bridge financing for the months of lease-up.
- Closing a purchase before a permanent lender can finish its review.
Each loan fits one stage of a building's life, and each one repays the loan before it:
| Construction loan | Bridge loan | Permanent loan | |
|---|---|---|---|
| What it finances | A building not yet built | A standing building on its way to stable income | A leased, stabilized building |
| Usual length | The building period | Up to three years, often with extensions | Often 10 years or more |
| Payments | Interest, often from a reserve | Interest only | Principal and interest |
| Rate | Usually floating | Usually floating | Fixed or floating |
| What sizes the loan | The cost and the value once complete | The cost and the value today | The income the building earns |
| What repays it | A bridge or permanent loan | A permanent loan or a sale | Its payments, then a balloon at maturity |
The OCC notes that loans from life insurance companies and commercial mortgage-backed securities lenders "usually feature loan terms of 10 years or more with fixed rates". Underwriting a home loan follows other rules, which our guide to underwriting in real estate covers.
A bridge lender sizes the loan on the purchase price and the renovation budget, funds part of it at closing and the rest as the work is done, and collects interest only until the owner sells or refinances the building. Most bridge loans float with a short-term rate, so the payment moves every month.
The loan has six working parts:
- Loan-to-cost. The lender caps the loan at a share of the price plus the work. The OCC writes that lenders set limits "as a maximum percentage of cost (i.e., LTC) as well as market value (i.e., LTV) to ensure that the borrower contributes sufficient equity".
- Value today and value later. The appraisal states the as-is value, the building in its current state, and the as-stabilized value, the building once leased. The OCC lists appraisals "on an as-is and as-completed or as-stabilized basis". The valuation guide explains why one building carries several values.
- Future funding. The lender keeps the renovation share of the loan and releases it as the work passes inspection.
- Interest only. The payments cover interest, and the whole balance falls due at maturity.
- Floating rate. The rate is a benchmark plus a spread. In the United States the benchmark is usually the Secured Overnight Financing Rate (SOFR), "a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities" (New York Fed, SOFR).
- Interest reserve. An account pays the interest while the building earns too little. The OCC defines it as "a reserve account established by the lender and used by the borrower to cover loan interest during construction and lease-up".
Take an investor who buys an apartment building for $12,000,000. It earns net operating income (NOI) of $600,000 a year: rent less vacancy and operating expenses, before any loan payment. The plan is a $1,600,000 renovation. Every figure in the example is an assumption for the arithmetic except SOFR.
| Bridge loan item | Amount |
|---|---|
| Purchase price | $12,000,000 |
| Renovation budget | $1,600,000 |
| Total cost | $13,600,000 |
| Loan at 75% of cost | $10,200,000 |
| Funded at closing | $9,000,000 |
| Future funding for the renovation | $1,200,000 |
| Borrower's equity | $3,400,000 |
| Rate: SOFR plus 3.50 points | 7.25% |
SOFR averaged 3.75% in September 2026 (FRED, SOFR), so the loan starts at 7.25%. Interest on the $9,000,000 drawn at closing comes to $652,500 a year. The building earns $600,000, so the borrower funds an interest reserve to cover the gap while renovated units come back on the market.
A commercial bridge loan rate is a floating benchmark plus a spread. The lender sets the spread for the building, the business plan and the borrower's record. It sits well above a permanent loan's, because the lender carries the building through its emptiest years.
The benchmark can move a long way inside one term. SOFR averaged 0.03% in June 2021 and 5.30% in August 2023. A borrower who closed a three-year bridge loan in mid-2021 saw its benchmark rise by about five points within two years. The market outlook shows what a rise in rates does to one building.
The exit strategy is the plan to repay the bridge loan at maturity, with a permanent loan sized on the building's new income or with a sale. The OCC calls permanent loans "take-outs" because they take the short-term lender out.
A permanent lender sizes its loan on the income of the stabilized building. One of its tests is the debt service coverage ratio (DSCR): NOI divided by the year's loan payments. The lending guide explains how DSCR limits a commercial loan.
Suppose the renovation lifts NOI to $1,050,000. The permanent lender asks for a DSCR of 1.25 and amortizes over 30 years at 6.74%. That rate is the 10-year Treasury yield's September 2026 average of 4.99% (FRED, 10-year Treasury yield) plus an assumed 1.75 points. The NOI then supports $840,000 of payments a year and a loan of $10,803,578. It repays the $10,200,000 bridge balance with $603,578 to spare.
The chart draws the permanent loan for every level of income the plan might reach.
Source: Sphera Credit calculation: the largest 30-year loan whose payments the NOI covers 1.25 times, at 6.74%, the 10-year Treasury yield's September 2026 average of 4.99% (FRED, series DGS10) plus an assumed 1.75%.
The line shows why the bridge loan exists. On its income at purchase, the building would carry a permanent loan of about $6.2 million, far below the $9,000,000 the bridge lender advanced. The exit works once NOI passes $991,338, about 94% of the plan. A lease-up that falls 6% short of its target leaves the borrower to pay the difference in cash.
A permanent lender also tests the loan against the building's value and its debt yield, and the lowest result sets the loan. Run your own figures in the commercial mortgage calculator.
A commercial bridge loan has three main risks: the lease-up falls short, rates rise before the exit, and the loan matures before the building is ready. Each one shrinks the permanent loan or delays it.
When the loan comes due early, the borrower asks for an extension, refinances into a smaller loan and adds cash, or sells. Lenders read an extension as a warning. The OCC writes that "a renewal, refinancing, or extension of a loan on an interest-only basis can indicate a troubled loan".
An interest rate cap is a contract that pays the borrower when the benchmark rises above a set level, called the strike. Many bridge lenders ask for one. The OCC notes that borrowers "can hedge their interest rate risk by using interest rate derivatives".
The cap protects the bridge loan's payment and leaves the exit exposed. In the example, a cap with a 4.50% SOFR strike holds the bridge rate at 8.00%, or $816,000 a year on the full balance. The permanent loan prices off the 10-year Treasury yield, which the cap ignores. At 7.74%, one point higher, the plan's NOI supports $9,780,343, and the borrower brings $419,657 to close. The break-even NOI rises to $1,095,054, above the plan.
A full interest reserve keeps the loan current, and it proves nothing about the building. The OCC warns that "the presence of an interest reserve may not accurately reflect a borrower's ability to pay". When a lender tops up a depleted reserve with more debt, the OCC calls it "a red flag indicating possible credit deterioration".