How to Refinance Out of a Commercial Bridge Loan

A takeout lender underwrites trailing income, not a pro forma, so the first step in planning a refinance is defining the occupancy and net operating income level the property needs to reach before a permanent loan will size to the balance owed on the bridge loan. Most agency and bank lenders want to see physical occupancy at 90 percent or higher, sustained for a minimum period, before they will treat the income as stabilized.

As an illustration, a property refinancing a $9,000,000 bridge loan balance might need to stabilize at $850,000 in trailing net operating income to support a permanent loan at a 1.25x debt service coverage ratio and prevailing rates. Tracking that target against the actual leasing pace each month, rather than only checking it near maturity, shows early whether the plan is on schedule for the refinance.

Seasoning is the length of time a lender wants to see stabilized income actually held before it will underwrite a refinance off that income, and it exists because a single strong month does not prove the property will perform that way going forward. Agency lenders commonly want 90 days of stabilized occupancy and income at a minimum, and some want 6 months or more depending on the property type and loan program.

Banks and life companies vary more widely on seasoning than agency lenders, and some will underwrite off a shorter trailing period if the sponsor can show a clear, executed leasing pipeline supporting continued income growth. Confirming the specific seasoning requirement with the target lender early avoids planning a refinance date that the trailing financials will not yet support.

Agency financing, through Fannie Mae or Freddie Mac programs, generally offers the most competitive long-term rates and terms for stabilized multifamily properties, but it comes with the most structured underwriting: a defined seasoning period, minimum debt service coverage ratio, maximum loan-to-value, and property condition and environmental reports refreshed for the refinance even if the bridge lender ordered similar reports at acquisition.

Agency underwriting also reviews the sponsor's experience and net worth against the requested loan amount, similar to the original bridge loan underwriting, and typically takes 45 to 75 days from application to closing once the property meets the seasoning and income requirements. Starting the application only once the deadline is close leaves little room for a documentation request that adds weeks.

Local and regional banks and life insurance companies offer an alternative to agency financing, often with more flexibility on property type and seasoning but typically at a higher rate or lower proceeds than an agency loan would provide on the same stabilized property. A bank relationship a sponsor has used before can move faster through underwriting than a new agency lender starting from scratch.

Life company loans generally require a higher level of stabilization and a stronger sponsor balance sheet than a bank loan, but often offer longer fixed-rate terms, sometimes 10 years or more, which suits a sponsor planning a long-term hold rather than a near-term sale. Comparing all three options, agency, bank, and life company, against the specific property and hold plan avoids defaulting to whichever lender is easiest to reach first.

The refinance application should typically start 90 to 120 days before the bridge loan matures, early enough to absorb a documentation request or an appraisal that comes in lower than expected without running into the maturity date. Waiting until 30 or 45 days before maturity to start the process removes the room needed to negotiate terms or switch lenders if the first option falls through.

Build the application timeline backward from the maturity date: underwriting and appraisal typically take 45 to 75 days depending on the lender type, so the application itself needs to go in with enough buffer for that full process plus a contingency for delay, not the fastest case the lender quoted verbally.

Most bridge loans carry an exit fee, often 0.5 percent to 1 percent of the loan amount, due at payoff regardless of when the loan is repaid, and some carry a minimum interest period, sometimes 6 months, that applies even if the loan pays off earlier. Reading the prepayment section of the loan documents before planning the refinance date avoids an unexpected fee that changes the payoff math.

As an illustration, a $9,000,000 bridge loan with a 0.75 percent exit fee adds $67,500 to the payoff amount, a figure that needs to be included in the refinance sizing alongside the outstanding principal and any accrued interest. A sponsor who forgets the exit fee when comparing bridge proceeds to refinance proceeds can end up short at closing.

A permanent loan sized to a conservative debt service coverage ratio sometimes produces proceeds below the outstanding bridge loan balance, particularly if stabilization came in under the original projection or rates moved up during the hold period. The gap has to be filled from somewhere: additional sponsor or investor equity, a short-term extension on the bridge loan while income catches up, or a smaller secondary piece like preferred equity behind the new permanent loan.

Running the refinance sizing well before the application, not after the appraisal comes back, gives a sponsor time to plan for a gap rather than reacting to it. A sponsor who identifies a likely shortfall 90 days out can negotiate a bridge extension or line up additional equity on reasonable terms; one who discovers it two weeks before maturity has far fewer options.

The most common mistake is starting the refinance conversation only when the maturity date is close, which leaves no time to absorb a slow appraisal, a documentation request, or a lender who ultimately declines the deal. A second is underestimating the seasoning period a takeout lender actually requires, assuming a single strong month of income is enough when the lender wants 90 days or more.

A third mistake is forgetting the bridge loan's exit fee and any minimum interest period when sizing the refinance payoff, which can leave a sponsor short at closing by an amount that should have been planned for months earlier. A fourth is comparing only one takeout option instead of checking agency, bank, and life company terms against the specific property.

H Equities evaluates and structures first mortgage bridge loans from $5 million to $50 million, interest-only, with terms typically 12 to 24 months, nationwide, and discusses the exit and refinance plan as part of structuring the original loan and any extension. Sponsors bring in H Equities when a takeout is falling short of the outstanding balance and the capital stack needs a bridge extension, mezzanine debt, or preferred equity to fill the gap until permanent financing closes.