Money & Finance › Commercial real estate lending › Commercial real estate loans: how income property is financed
Bridge loans: short-term, floating-rate transition financing
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
Short floating-rate loans, usually one to three years, that carry a property through lease-up, renovation or repositioning until permanent financing fits.
See it on the Money & Finance map →How it works
Debt funds and mortgage REITs, plus some banks, lend about 65–80% of current value or cost, including future funding for renovations and leasing costs. Terms are usually two or three years plus one-year extensions that require DSCR or debt-yield tests. The rate is one-month Term SOFR plus about 3–5 points, interest-only, and the borrower must usually buy a rate cap. Fees run about 1% at closing, sometimes also at payoff. Most are non-recourse with carve-outs. The exit is a refinance or sale.
Why it matters
Pros: speed, high leverage and room for a business plan banks won't finance. Cons: high cost and rate risk; when SOFR jumped in 2022–23, many floating borrowers could not refinance.
Facts, rules and data
Mortgage REIT filings (Blackstone Mortgage Trust, Starwood Property Trust and others), CRE CLO deal reports, and Trepp and MSCI data on floating-rate loan performance.
Debates and risks
How many 2021–22 bridge loans on apartments and offices will still be repaid in full, rather than written down, remains unresolved.
Inside this (1)
Connections (5)
▸Bridge loans: short-term, floating-rate transition financing float over SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
A bridge loan's rate is one-month Term SOFR plus a spread, reset monthly. When SOFR rose from near zero in early 2022 to about 5.3% by mid-2023, a loan at SOFR plus 3.5 points went from about 3.5% to nearly 9%, more than doubling interest. Lenders require rate caps to limit that risk.
When and why
US bridge lending; borrowers who bought cheap caps in 2021 often faced far costlier replacement caps when extending in 2023–24.
How we know
CME Term SOFR data, the Fed's rate history, and mortgage REIT and CRE CLO reports showing floating-rate loan stress.
Debates and risks
How far the Fed's rate cuts since 2024 will rescue floating-rate borrowers, versus how many loans still need losses taken, remains unclear.
▸Bridge loans: short-term, floating-rate transition financing usually require Interest-rate caps on floating-rate loansFact, law or data
The connection
A bridge loan floats over SOFR, and the property often barely covers debt service during lease-up. To keep rising rates from sinking it, the lender requires the borrower to buy a cap, typically at a strike that keeps DSCR near 1.0x, for the initial term, and a new cap for each extension.
When and why
Standard in US bridge, debt-fund and CRE CLO loans; a major issue in 2022–24 when caps on many 2021 loans expired.
How we know
Bridge loan agreements and CRE CLO deal documents, which spell out cap requirements, and mortgage REIT filings.
Debates and risks
Whether lenders should waive or help fund replacement caps for struggling borrowers, as some did in 2023, is negotiated loan by loan.
▸Bridge loans: short-term, floating-rate transition financing are a specialty of CRE debt funds and mortgage REITs: the non-bank lendersFact, law or data
The connection
Banks face capital charges and examiner scrutiny on half-leased or under-renovation buildings, so non-bank lenders took over that niche. Debt funds and mortgage REITs make bridge loans, then fund them with bank repo lines and CRE CLO bonds, earning the spread between the loan rate and their own cost.
When and why
The US market since about 2010; CRE CLO issuance, their main funding route, peaked in 2021–22.
How we know
Mortgage REIT annual reports show loan books dominated by floating-rate bridge loans; CRE CLO reports track the collateral monthly.
Debates and risks
Whether non-bank bridge lenders stay disciplined, or loosen terms again as they compete for deals, is watched closely.
▸Hard-money loans: fast, costly, asset-based private loans are the costliest kind of Bridge loans: short-term, floating-rate transition financingFact, law or data
The connection
Both are short, interest-only loans that carry a property to a sale or refinance. Institutional bridge lenders finance a business plan on larger loans at SOFR plus 3–5 points. Hard-money lenders take smaller, quicker, messier deals at roughly 9–14% plus points, relying almost entirely on the property's equity.
When and why
Hard-money lenders are mostly local private lenders and funds; institutional bridge lenders are debt funds and mortgage REITs.
How we know
Lender rate sheets and loan documents, and mortgage REIT filings for institutional bridge terms.
Debates and risks
The line between the two blurs, and data on how private hard-money loans perform are scarce.
▸Apartment (multifamily) real estate suffered floating-rate defaults on Bridge loans: short-term, floating-rate transition financingFact, law or data
The connection
In 2021–22 many buyers, often syndicators raising money from individual investors, bought Sun Belt apartments at high prices with floating-rate bridge loans. When SOFR rose from near zero to over 5%, interest costs more than doubled, rate caps expired and values fell. Many could not refinance, leading to defaults, capital calls and foreclosures.
When and why
Mainly Texas, Arizona, Florida and Georgia, 2023–26, in loans held by debt funds, mortgage REITs and CRE CLOs.
How we know
CRE CLO delinquency reports from Trepp and CRED iQ, mortgage REIT filings, and lawsuits and foreclosures involving syndicators.
Debates and risks
How many troubled loans were quietly modified rather than foreclosed, and how large final losses will be, remains unclear.