Bridge Loan vs. Permanent Financing

Take a $20 million value-add multifamily acquisition, illustrative numbers only. Financed with a bridge loan at 70% of as-stabilized value, the sponsor draws $14 million at an illustrative 9.5% interest-only rate, paying roughly $1.33 million a year while renovation and lease-up proceed. The sponsor budgets 18 months to stabilize, then refinances.

The same purchase financed instead with permanent debt at 65% LTV produces $13 million in proceeds at an illustrative 6.5% fixed rate, amortizing over 30 years. Annual debt service runs close to $986,000, lower than the bridge payment, but the lender requires 85% occupancy and trailing cash flow the property does not yet have, so this path is not actually available at closing.

The comparison shows the real tradeoff: the bridge loan costs more per year but is obtainable on a transitional asset and closes on the seller's timeline; the permanent loan costs less but only becomes available once the sponsor has already executed the business plan the bridge loan financed.

A bridge loan's governing documents (loan agreement, promissory note, mortgage, and often a completion or renovation reserve agreement) are written around a business plan and a defined exit, with covenants tied to leasing milestones or renovation draws rather than steady-state performance. Extension options, if included, typically require the sponsor to meet a minimum debt yield or occupancy test before the lender grants additional time.

A permanent loan's documents assume a stabilized asset from day one: the loan agreement references trailing operating statements, a completed rent roll, and standard DSCR and LTV covenants tested annually. Prepayment is addressed very differently between the two. Bridge loans usually carry minimal or no prepayment penalty since an early payoff is the expected outcome, while permanent loans often include yield maintenance or defeasance that can cost hundreds of thousands of dollars if the sponsor exits early.

At acquisition, the bridge loan is usually the only realistic option for a transitional property, since no permanent lender will underwrite income that does not yet exist. As the business plan executes and occupancy climbs, the calculus shifts: the sponsor's priority moves from flexibility to cost, and the bridge loan's maturity date starts working against the sponsor rather than for it.

By month 12 to 18 of an 18 to 24 month bridge term, most sponsors are actively marketing the refinance, since permanent lenders need 45 to 90 or more days to close and the property typically needs a few months of stabilized trailing income before it qualifies. Waiting until the bridge loan is near maturity to start that process is the most common way sponsors end up needing an extension or a more expensive rescue solution instead of a clean permanent takeout.

The choice mostly answers itself once a sponsor is honest about the property's current condition and the certainty of the exit, but a few questions still deserve a direct answer before signing a term sheet.

The two are not really alternatives on the same deal so much as sequential stages of the same deal, a pattern often called bridge to perm. The bridge loan finances the acquisition and the value creation; the permanent loan takes out the bridge once the property has the trailing performance to qualify. Sponsors who plan this sequence from the outset, rather than deciding at maturity, generally get better permanent pricing because they can time the refinance to strong trailing financials instead of a looming deadline.

H Equities structures bridge loans with this exit in mind, sizing the interest-only period and any extension options around a realistic path to a permanent takeout rather than assuming the sponsor will simply sell.