Commercial bridge loans work by lending you short-term money, usually interest-only and often at a floating rate, against a property that isn't ready for permanent financing yet, which you repay by refinancing or selling once the property's income has stabilized. The day you close, your payoff depends on income the building hasn't earned yet. And on many of these loans the rate is SOFR plus a spread, so your payment moves when SOFR moves. SOFR was 3.87% on October 19, 2026, according to the New York Fed.
Key points
- A bridge loan funds a plan. The lender sizes it on your cost and the property's value, and part of the money can be held back for renovations or set aside to pay interest.
- On a floating-rate bridge, your payment moves with SOFR, and the loan documents may require you to buy an interest rate cap, including a new one to extend.
- A permanent lender will size your payoff loan on the income you've actually achieved, so run that test before you sign the bridge.
What is a commercial bridge loan?
The OCC's Comptroller's Handbook on commercial real estate lending defines a bridge loan as "short-term financing to allow newly constructed or acquired commercial properties to reach stabilization necessary for either sale or qualification for permanent financing."
Stabilization is the word that matters. If your property already has the occupancy and income a permanent lender wants, a bridge usually isn't the first place to look. It can still make sense if a permanent loan can't close by your deadline, if you plan to sell or refinance soon, or if the permanent loan's prepayment terms would cost you more than the bridge's higher rate. Our comparison of bridge loans and permanent financing covers when each one fits.
How do commercial bridge loans work, step by step?
The bridge pays for the purchase and the work, you carry the interest while income builds, and a permanent loan or a sale pays the bridge off.
- Sizing. The lender measures the loan against your total cost and the property's value. You fund the rest as equity.
- Funding. Part of the loan funds at closing. Renovation money can be held back and released as work is completed, and an interest reserve may be set aside.
- Monthly interest. You pay interest, often at a floating rate that resets as SOFR moves.
- Extensions. The first term is short. More time is available only if the property meets conditions written into the loan.
- Exit. You refinance into a permanent loan or sell, and the proceeds pay off the bridge.
How is a commercial bridge loan sized?
Two measures matter here. Loan-to-cost, in the OCC's words, divides the loan "by the total cost of the property plus all construction costs." Loan-to-value compares the loan to an appraised value, and on a property in transition the OCC notes that "two prospective value opinions may be required to reflect the time frame during which development, construction, and occupancy occur."
Hypothetical example: you buy a property and plan a renovation, and a lender agrees to 80% of total cost. This budget is simplified. It leaves out closing costs and the rate cap premium, so the cash you'd actually need is more than the equity line shows.
| Budget line | Amount |
|---|---|
| Purchase price | $10,500,000 |
| Renovation | $1,500,000 |
| Interest reserve | $500,000 |
| Total cost | $12,500,000 |
| Loan at 80% of cost | $10,000,000 |
| Your equity (before closing costs and cap premium) | $2,500,000 |
In this example, of the $10,000,000, $8,000,000 funds at closing toward the purchase, $1,500,000 is held back for renovation draws and $500,000 goes into the interest reserve. The OCC describes an interest reserve as "a reserve account established by the lender and used by the borrower to cover loan interest during construction and lease-up." It keeps the loan current while the rent roll is thin. It's also borrowed money you pay interest on, and once it runs dry the interest comes out of the property's income or your pocket.
What will you pay each month on a bridge loan?
On many floating-rate commercial real estate loans, Frost Brown Todd attorney Doug Walter explains in Reuters Legal News (November 2023), the benchmark is usually SOFR and "the lender adds a credit spread," with the rate resetting "typically monthly."
For a sense of where spreads have landed, look at CRE CLOs, the bonds lenders package bridge loans into. CRED iQ studied 160 loans originated for recent CRE CLOs, with multifamily making up nearly 80% of the sample by balance. Per CRE Daily's July 2026 summary, they carried an average spread of 303 basis points over SOFR and an average all-in coupon of 6.68%, and almost 95% of the collateral had full-term interest-only terms. Those are averages for one slice of the market at origination. They aren't a quote for your property.
Hypothetical example: at a 3.00% spread over SOFR of 3.87%, your rate is 6.87%. The $10,000,000 is the loan commitment. In this example, interest is charged on the balance you've drawn, so the payment starts lower and climbs as renovation money goes out. Once the loan is fully funded, and assuming the rate doesn't change, interest only is $687,000 a year, about $57,250 a month. At that full-funding payment, the $500,000 reserve lasts approximately 8.7 months, assuming the reserve pays all the interest with no help from the property's cash flow. Every 1.00 point rise in SOFR adds $100,000 a year on the full balance.
That exposure is what a rate cap is for. You make a one-time payment when you buy it, and if SOFR rises above the cap's strike rate, the cap's counterparty pays the excess, which Walter describes as "effectively capping the interest rate for the borrower." Hypothetical example: with a 5.00% strike and a 3.00% spread, your loan rate keeps floating with SOFR, but the cap payments cover the excess above the strike, so your net interest cost after those payments tops out at 8.00%, or $800,000 a year on the full $10,000,000. That assumes the cap uses the same benchmark as your loan, covers the full balance and runs for the whole period. The cap doesn't change the rate in your loan documents. You still owe the lender the full floating rate, and the cap payments offset the part above the strike. Take the cap requirements seriously. Walter writes that a breach is usually severe, "including an event of default, and, if the loan is non-recourse, triggering recourse to the guarantor."
What happens if the business plan runs long?
Walter writes that bridge loans on transitional properties "often have short initial loan terms of two or three years, with one or more one-year extension options for the borrower, provided that certain conditions are met," and one of those conditions is a rate cap for the extended term. Treat every extension as conditional. Before you sign, get in writing:
- the performance tests the property must pass to extend
- what each extension costs
- whether a new cap is required, and at what strike
The market is leaning on extra time right now. Per Bisnow's October 2026 report, Fitch Ratings says U.S. landlords struggling to secure permanent financing are "rolling one floating-rate bridge loan into the next." Bisnow adds that loans in Fitch-rated deals look fine on paper partly because "lenders keep rewriting the terms, often by giving borrowers more time." Time beyond your written extension options has to be negotiated, so don't build your plan around getting it.
How do you pay off a commercial bridge loan?
You pay it off with a sale or a permanent loan, and the permanent lender sizes that loan on the income you've achieved. The OCC lists debt yield, DSCR and LTV among the most common financial covenants on income-producing loans. DSCR is the debt service coverage ratio, the property's net operating income (NOI, its income after operating expenses and before loan payments) divided by its annual loan payments. LTV is loan-to-value. If a lender applies all three, the tightest one sets your loan. Debt yield is the simplest to run yourself (here's the refinance math). Under a debt-yield test, the maximum loan equals NOI divided by the required debt yield.
Hypothetical example: you owe $10,000,000, and the permanent lender requires a 10% debt yield. At $1,000,000 of NOI, the maximum loan is $1,000,000 divided by 10%, or $10,000,000.
| Stabilized NOI | Most a 10% debt yield allows | Against a $10,000,000 payoff (provisional, before DSCR, LTV and transaction costs) |
|---|---|---|
| $1,100,000 | $11,000,000 | Up to $1,000,000 of room, if DSCR and LTV allow it |
| $1,000,000 | $10,000,000 | Pays the balance, nothing left for costs |
| $900,000 | $9,000,000 | $1,000,000 short |
In this example, income $100,000 short of plan turns a clean payoff into a $1,000,000 check, before the DSCR and LTV tests have their say. If your plan only works in the top row, it's thin. Find that out at the term sheet, while you can still change the loan size, the budget or the timeline.
Is a bridge loan the right move for your property?
A bridge fits when your plan adds income a permanent lender will count and you have the equity to carry it until then. The risk you carry is that the income arrives late. If your property already qualifies for a permanent loan, compare the two on more than qualification: how fast each can close, how long you plan to hold, and what the permanent loan's prepayment terms would cost if you sell or refinance early.
Once you see how commercial bridge loans work on paper, test your own exit before a lender does it for you. Northern Ridge Capital is a commercial real estate debt broker for loans of $5 million to $30 million, and our page on commercial bridge loans covers the loan types. To run your numbers, book a call and bring your current rent roll, operating statement and renovation budget. You'll go through your budget, your interest carry and your exit test with a broker before you commit to a term sheet.
FAQ
How long does a commercial bridge loan last?
Walter describes initial terms of two or three years, often with one or more one-year extension options if conditions are met. The OCC's guidance for banks says interest-only loan tenors are "usually three to five years maximum."
Are commercial bridge loans interest-only?
Many are. Almost 95% of the collateral in CRED iQ's sample of recent CRE CLO loans had full-term interest-only terms. The OCC says interest-only periods should generally be limited to construction or stabilization periods, when cash flow can't yet support principal payments.
Do you need a rate cap on a commercial bridge loan?
If the loan floats, the documents may require one. Walter writes that if you exercise an extension option, "a rate cap for the extension term will be required as a condition."
What happens if you can't refinance a commercial bridge loan at maturity?
Your options are an extension if the property meets its conditions, a negotiated modification, a second bridge, a sale, or cash to cover the gap. Run the refinance test early, while you still have time to choose among them.