Commercial Property Refinance: Permanent Loan or Bridge?
A commercial property refinance replaces the existing mortgage on an income property with a new loan, capped by the lender's sizing tests, usually debt service coverage and loan to value, plus debt yield where the program uses it. For an apartment owner, take a permanent loan now if the loan today's documented income supports, plus any cash you put in, covers the payoff and closing costs, and consider a bridge loan first only if renovations or lease-up must finish before it can.
Key points
- The loan is limited by whichever of the lender's tests gives the smallest amount. Not every program sets a debt yield minimum, so ask which tests apply.
- In a renovation or lease-up like the example below, a bridge fits only if its net proceeds at closing plus committed owner cash cover the payoff and a permanent loan can later repay it.
- Decide with a written payoff figure, the net cash each path delivers at closing, and a stress test of the bridge's exit.
How is a commercial property refinance loan sized?
The OCC's Commercial Real Estate Lending handbook (Version 2.0, March 2022, revised March 2025) defines DSCR as NOI divided by annual debt service and LTV as the loan divided by the property's market value. It calculates debt yield as NOI divided by the loan amount and says debt yield, "when used," should be supported by prudent DSCR and LTV ratios.
| Test | Formula | What reduces allowable proceeds |
|---|---|---|
| Debt service coverage ratio (DSCR) | Annual underwritten NOI divided by the new loan's annual principal and interest | A higher rate or shorter amortization raises the payment and shrinks the loan |
| Loan to value (LTV) | Loan principal divided by appraised value | A higher cap rate in the appraisal lowers value even when income is steady |
| Debt yield | Annual underwritten NOI divided by loan principal | It ignores rate and amortization, so it can cap proceeds when rates are low |
Hypothetical example: every figure here is illustrative, not market data. A building with underwritten NOI of $810,000 has an appraised value of $13,000,000 and a loan payoff of $10,000,000. Assume the lender requires a 1.25 DSCR, caps LTV at 75%, wants an 8% debt yield, and prices the loan at 6.00% on 30-year amortization.
- DSCR: $810,000 divided by 1.25 allows $648,000 a year of principal and interest, which supports about $9,000,000 at those terms.
- LTV: $13,000,000 times 75% is $9,750,000.
- Debt yield: $810,000 divided by 8% is $10,125,000.
DSCR binds, so these tests cap the gross loan at about $9,000,000. Closing costs and any upfront escrows come out of that, so the payoff shortfall is about $1,000,000 before those costs and larger after them.
What do lenders check on the rent roll?
Reconcile the file yourself before a lender sees it, in this order:
- Match each unit on the rent roll to a signed lease: tenant, rent, start and end dates.
- Tie each unit to its tenant ledger, so charges, payments, concessions and balances owed agree with the lease.
- List every concession, such as free months or move-in specials, and the period it covers.
- Age the arrears: who owes, how much, and for how long.
- Tie ledger collections to the operating statement and bank deposits for the same months, separating security deposits and other non-rent receipts.
Lenders look at both occupancy measures. MRI Software, a property management software firm, defines physical occupancy as the share of units rented and occupied, and economic occupancy as actual income compared with potential income if all units were leased at market rates. Show both on your rent roll summary and explain any gap between them before the lender asks.
Which expenses will a lender rebuild?
Expect lenders to rebuild your expense budget:
- Add a management fee even if you self-manage. The OCC notes NOI analysis may include "expenses that may not represent an actual or immediate cash expense, such as management fees and reserves for capital replacements."
- Deduct a replacement reserve, which the OCC says "is imputed for underwriting purposes irrespective of whether it is actually funded."
- Use the tax bill and insurance premium expected during the new loan, including any pending reassessment or expiring abatement.
Permanent or bridge: which commercial property refinance fits your building?
| Factor | Permanent loan | Bridge loan |
|---|---|---|
| Property readiness | Requires stabilized occupancy and a collections history, plus the program's eligibility rules (HUD's are below) | Built to carry a building through lease-up or improvements to stabilization |
| Income underwritten | Documented income the building produces now, with history and projections tested against it | Gives projected income more weight, but the OCC says those assumptions "should be well supported and carefully analyzed" |
| Rate | The OCC says life insurer, pension fund and CMBS loans "usually feature loan terms of 10 years or more with fixed rates" | Ask whether it floats and whether a rate cap is required, and add the cap's cost to your carry. The OCC notes rising rates can hurt repayment when floating rate debt meets fixed rents |
| Term | A loan that doesn't fully amortize leaves a balloon at maturity | The OCC says bridge loans are usually written for up to three years. Ask what extension options exist and the tests each requires |
| Recourse | The OCC calls those life insurer, pension fund and CMBS loans "commonly nonrecourse." Ask which guaranties still apply and which events would make the loan full recourse. Bank terms vary | Get recourse and guaranty terms in writing |
| Prepayment | Yield maintenance (a lump sum covering the lender's reinvestment loss), defeasance (government securities replace the property as collateral) or a premium that steps down each year, per a 1999 USC Lusk Center working paper. Price it against your hold period | Ask about exit charges and any minimum interest owed if you repay early |
| Reserves | Recurring replacement reserves, plus repair escrows where the condition report calls for them | Ask whether renovation money is held back and drawn as work is done, and what each draw requires |
HUD's Section 223(f) program insures lenders against loss on default, allows terms up to 35 years and excludes properties needing substantial rehabilitation. A March 2020 HUD notice ended its rule of three years since completion and accepts an application once a newly built or substantially rehabilitated property reaches the program's DSCR for one full month.
Should you refinance now or bridge first?
Start with a written payoff statement from your current lender, including any prepayment premium or defeasance cost.
- Go permanent now when net proceeds on documented income, after closing costs, cover the payoff or leave a gap you can fund in cash, the building meets the program's eligibility rules, and the prepayment terms fit your hold.
- Consider a bridge first only when its net proceeds at closing, after holdbacks, reserves and costs, plus owner cash you have committed, cover the payoff; the carrying deficit, draw timing and a contingency are funded; the improvement plan is specific; the term (counting only extensions you can meet) reaches stabilization; and a permanent loan on stabilized income would repay it.
What does each path cost in the worked example?
Hypothetical example (continued): both paths do the same $1,200,000 renovation over the same 24 months, and NOI averages $720,000 a year while units are offline. Permanent closing costs are $200,000. The bridge funds 75% of the $13,000,000 value at closing, holds back the renovation budget and releases it in two equal draws at the end of months 6 and 12, charges a fixed 8.00% interest only for 24 months and costs $250,000 to close. Its interest runs ahead of NOI, so assume the lender requires an interest reserve, which the OCC says may be "funded by the borrower into a separate escrow account as a condition of the loan."
| Permanent now | Bridge first | |
|---|---|---|
| Loan at closing | About $9,000,000 | $9,750,000 funded, plus $1,200,000 held back for renovation |
| Closing costs | $200,000 | $250,000 now and $200,000 later for the permanent loan |
| Net loan cash toward the $10,000,000 payoff | About $8,800,000 | $9,500,000 |
| Owner cash toward the payoff | About $1,200,000 ($1,000,000 of principal reduction plus $200,000 of closing costs) | $500,000 |
| Interest shortfall the owner reserves for (24-month total) | None in total (NOI exceeds the payment by about $145,000) | $240,000 |
| Renovation funding | $1,200,000 of owner cash on top of the payoff cash | $1,200,000 of borrowed holdback |
| Debt service over 24 months | About $1,295,000 of principal and interest (about $1,067,000 of it interest) | $1,680,000 of interest ($390,000 in months 1 to 6 plus $414,000 in months 7 to 12 plus $876,000 in months 13 to 24) |
| NOI over 24 months | $1,440,000 | $1,440,000 |
| Owner cash put in over 24 months | About $2,400,000 | $740,000 |
| Cash flow to the owner after debt service | About $145,000 | None |
| Net owner cash in | About $2,255,000 | $740,000 |
| Loan balance at month 24 | About $8,772,000 | $10,950,000, due within 24 months |
These are 24-month totals; a monthly schedule of collections, renovation spending and draw timing sets the actual reserve and peak cash need. Before the reserve, the bridge needs $700,000 less owner cash at closing; the reserve cuts that to $460,000. Net of the permanent path's cash flow, the bridge asks about $1,515,000 less of the owner over two years, but it ends with about $2,178,000 more debt, about $613,000 more interest and a second set of closing costs.
The permanent path has its own test. During the work, NOI of $720,000 covers the roughly $648,000 annual payment only about 1.11 times, below the 1.25 used to size the loan. A permanent lender may require consent for a renovation this size or apply a coverage covenant, so get its written approval of the plan before choosing that path.
That trade holds only if the exit works. The permanent loan must repay $10,950,000 plus $200,000 of costs, or $11,150,000. Assume stabilized NOI of $1,050,000 and a stabilized value of $16,000,000 with the same 1.25 DSCR, 75% LTV and 8% debt yield. At 6.00% DSCR binds at about $11,675,000 with roughly $525,000 to spare. Change one assumption at a time:
- NOI of $950,000: about $10,563,000 and short about $587,000.
- Rate of 7.00%: about $10,522,000 and short about $628,000.
- Value of $14,000,000: LTV caps the loan at $10,500,000 and leaves it short $650,000.
- All three at once: DSCR caps the loan at about $9,519,000 and leaves it short about $1,631,000.
Any single miss costs more new cash at the exit than the $460,000 the bridge spared at closing, and all three together, about $1,631,000, exceed the $1,515,000 it spared over two years. Price that risk before choosing the bridge.
Northern Ridge Capital, a debt broker rather than a lender, outlines refinance options for $5M to $30M loans.
FAQ
Do lenders use my pro forma rents?
Not hoped-for rents. The OCC lists "historical, current, and projected rental rates" in underwriting, but a projection counts only if the program accepts its support. For recently completed 223(f) properties, HUD underwrites "to actual revenue collected." A bridge lender may weigh supported projections more, so bring signed leases on renovated units and comparable rents.
Does a cash-out refinance change how the loan is sized?
The same tests apply, and cash out is what is left after the payoff and costs. Some programs restrict leverage or hold back proceeds on a cash-out. HUD's 2020 notice makes cash out on a recently completed 223(f) property subject to the LTV limits of its MAP Guide and has the lender hold 50% of the available cash until the property meets minimum debt service coverage for each of six consecutive months.
Can I refinance if my building won't cover the current payoff?
Often, if you fund the gap and meet the lender's eligibility rules. Look at a cash-in permanent loan first, since it closes the gap with cash you control, then a bridge, whose exit depends on future income, then an extension, which only buys time. Any second loan behind the new first mortgage needs that new lender's consent, and the OCC's refinance risk guidance notes lenders may require "limits on incremental debt."