Commercial Real Estate Bridge Loan vs. Permanent Debt
A commercial real estate bridge loan is short-term, usually interest-only debt secured by the property that funds an acquisition, refinance or renovation until the property qualifies for long-term financing, and it is repaid by that refinance or by a sale. Apartment owners commonly use it for a renovation, a lease-up or a maturing loan.
Key points
- HUD dropped its blanket three-year wait in 2020. A newly built or substantially rehabilitated property can apply for a Section 223(f) loan once it meets the required coverage for one full month, and must show it for three consecutive months before the loan closes.
- Under HUD 223(f), ordinary unit upgrades don't block the loan, but work above HUD's substantial rehabilitation limit does. For 2026 that limit starts at $20,406 per unit before the local cost adjustment.
Should you take a bridge loan or go straight to permanent debt?
Go straight to permanent debt when the property already passes that loan's tests and the loan can realistically fund before your purchase deadline or current maturity. Take a bridge when either condition fails and a documented, funded plan will fix it before the bridge comes due.
HUD 223(f) is the permanent-loan example here because its rules are public; agency and bank loans set their own. HUD rules and figures checked October 6, 2026.
How does a commercial real estate bridge loan compare with going straight to permanent debt?
| Bridge loan, then a permanent loan | Straight to a permanent loan (HUD 223(f) shown) | |
|---|---|---|
| Qualifies before it's stable? | Often, subject to underwriting, a credible exit and enough liquidity. The lender weighs current income, collateral, your liquidity, track record and exit | No. If the certificate of occupancy is three or more years old, occupancy must average at least 85% for six months before the application and hold through endorsement. Newly built or substantially rehabilitated properties follow the coverage tests below instead |
| Term | Short, ending in a balloon (the full balance is due at maturity) | Up to 35 years or 75% of the property's remaining economic life, whichever is less |
| Most it will lend | Set by each lender against value, cost and the plan | The lowest of several tests. For market-rate properties, up to 87% of value and a 1.15 debt service coverage ratio under HUD Mortgagee Letter 2025-03, HUD's latest letter on these ratios as of October 6, 2026. Refinances are also capped at the greater of 80% of value or the cost to refinance |
| Renovation money | Often a holdback, released as work is inspected | Only work below the substantial rehab limit. Critical life-safety repairs must be done before endorsement; non-critical repairs can finish after closing with a 120% escrow |
| Rate exposure | Often floating until the takeout closes | The rate can move until the lender locks it, which it may do once HUD issues its commitment; after that, payments are level principal and interest |
| Equity and reserves | Equity at purchase plus your own carry and overrun reserves | Equity at closing; on newly built or substantially rehabilitated properties, 50% of any cash-out is held until six consecutive months at the required coverage |
| Prepayment | Set by the loan documents | Restricted for 5 years after endorsement, with exceptions such as agreeing with HUD to keep it as rental housing for the rest of that term (MAP Guide, section 3.7.10). The note and its Ginnie Mae security can add their own terms |
| Maturity risk | Refinance, sell or meet extension tests before maturity | None in the near term |
What does each path cost besides interest?
| When | Bridge first | Straight to permanent (HUD 223(f)) |
|---|---|---|
| At acquisition | Equity, origination fees (Northern Ridge Capital is paid a 1% origination fee at closing), any required rate cap, third-party reports, closing costs, and your carry and overrun reserve | Equity, HUD's application fee, the upfront mortgage insurance premium, lender fees, third-party reports, closing costs and, if repairs remain after closing, an escrow of 120% of HUD-approved deferred repair costs |
| During the renovation | Interest and carry that income doesn't cover through the work and lease-up, plus contractor bills you pay before a draw is reimbursed | The annual mortgage insurance premium on top of interest |
| At takeout or sale | Any exit charge or minimum interest, extension charges if the plan runs late, and a second round of closing costs, reports, premiums and escrows | Nothing new if you hold. A sale or refinance that prepays the loan within 5 years of endorsement falls under the prepayment terms above |
Does HUD still make new properties wait three years?
No. HUD Notice H 2020-03, issued March 2, 2020, lets newly built or substantially rehabilitated properties apply once they meet the required coverage for one full month. The MAP Guide (section 3.7.2) adds that construction must be complete, and coverage on actual revenue collected must hold for three consecutive months before endorsement.
A newly delivered building may need a bridge if its construction loan comes due before that clock, plus the lender's and HUD's processing time, has run, and that loan can't be extended or replaced by other permanent financing in time.
Does your renovation count as substantial rehabilitation?
Section 223(f) can't finance a property whose required work meets HUD's substantial rehabilitation threshold (MAP Guide, section 3.7.3). Check your scope:
- Total the Aggregate Cost. Include all proposed work, general contractor and architect fees, contingency and completion escrows spent, and change orders.
- Find your limit. Aggregate Cost Limit = base per unit × your area's High Cost Percentage × number of units (MAP Guide, section 5.1.2). HUD Mortgagee Letter 2026-05, dated May 20, 2026, sets the 2026 base at $20,406 per unit. Cincinnati, for example, is listed at 270%.
- Compare. At or below the limit, the work counts as repairs and alterations, and 223(f) can include it if the property passes the program's other tests. Above it, the property is substantial rehab, and 223(f) can't finance it until the work is done.
- Leave a margin. HUD's guide says to estimate the cost conservatively, not close to the limit, because the final cost, change orders included, must stay under it.
Hypothetical example: will the takeout repay the bridge?
Invented round numbers, not market data; the HUD limits are the sourced figures above.
An owner buys a 100-unit property for $12,000,000. The bridge funds $9,000,000 at closing and commits a $1,500,000 renovation holdback ($15,000 per unit, fees and contingency included), so the fully drawn principal is $10,500,000. The actual payoff adds accrued interest and any exit or other charges in the loan documents. The owner brings $3,000,000 of equity plus closing costs and keeps a $300,000 reserve.
Rehab test. In Cincinnati, at 270%, the limit is $20,406 × 270% × 100 = $5,509,620. The $1,500,000 scope sits well below it. The example assumes the property also passes HUD's other tests by then: 85% occupancy held for six months, credit and appraisal review, and critical life-safety repairs done before endorsement.
Takeout, plan works. Assume stabilized NOI, as HUD underwriting accepts it, of $1,000,000, a value of $15,000,000 and an annual debt constant of 7.0% (principal, interest and mortgage insurance together, an assumption rather than a quote).
- Coverage test: $1,000,000 ÷ 1.15 = $869,565 of annual debt service, ÷ 7.0% = about $12,422,000.
- Value test: 87% × $15,000,000 = $13,050,000.
- Refinance cap: the greater of 80% of value ($12,000,000) or the cost to refinance.
If the cost to refinance stays under $12,000,000, the cap binds at $12,000,000. Those proceeds first cover the takeout's closing costs and required escrows, then repay the bridge. The $1,500,000 above the principal has to cover those costs plus accrued interest and exit charges.
Takeout, NOI runs 20% short. NOI is $800,000 and value falls to $12,000,000. Coverage now caps the loan at about $9,938,000, below the 87% value test of $10,440,000. The owner needs about $562,000 in cash, plus interest, closing costs and escrows, to retire the bridge. Even if carry never touched the $300,000 reserve, about $262,000 must come from other cash.
A scope that crosses the limit. At $60,000 per unit ($6,000,000), the work exceeds the $5,509,620 limit, so 223(f) waits until it's done. Say the bridge funds $9,000,000 at closing plus a $4,500,000 holdback, and the owner pays the other $1,500,000 of work ($4,500,000 of equity in all) and keeps a $500,000 reserve. Fully drawn principal is $13,500,000. After the work, at NOI of $1,300,000, a value of $19,500,000 and 7.0%, coverage allows about $16,149,000, the value test $16,965,000 and the refinance cap (80% of value) $15,600,000. If the cost to refinance is no more than $15,600,000 and no other limit binds, the cap binds, leaving up to $2,100,000 over the principal before closing costs, escrows and payoff charges. This assumes the work is complete and the coverage history is met. On a substantially rehabilitated property, HUD also holds 50% of any cash-out until six consecutive months at the required coverage, so gross headroom isn't cash in hand.
What's the verdict?
- Go straight to permanent debt when occupancy has averaged 85% or better for six months (or a new or substantially rehabilitated property meets the coverage tests), a 223(f) repair scope stays under HUD's limit, the lender's timeline fits your deadline, and HUD's prepayment restrictions fit your planned holding period. You save a closing and drop a maturity date.
- Use a bridge loan for a temporary gap, such as units offline for renovation, a lease-up, or a deadline the permanent loan can't meet, when the plan is fully funded.
- Don't sign the bridge when the takeout, stressed for lower NOI and a higher debt constant, leaves a payoff gap you can't fund from cash or reserves. Shrink the bridge, add equity or change the plan first.
What should you check before signing a commercial real estate bridge loan?
| Term | What to check |
|---|---|
| Maturity and balloon | The maturity date, full balance due and any exit charge. The term must cover the takeout's seasoning test (six months of stable occupancy for an older property, three consecutive months at coverage for a new or substantially rehabilitated one) plus the takeout lender's processing time, in writing |
| Takeout sizing | Whether the likely takeout still repays the full payoff at a higher debt constant and lower NOI |
| Holdback and draws | What funds at closing, what's held back, and how draws are released (inspections, lien waivers, whether you pay contractors first) |
| Extensions | The coverage, occupancy and loan-to-value tests, any extension charge, any required paydown and any new rate cap |
| Recourse | Your personal liability if the loan isn't repaid, from non-recourse with carve-outs to a full guarantee |
Getting the financing lined up
Northern Ridge Capital is a debt broker, not a lender. It works on multifamily and other commercial loans from $5M to $30M. Northern Ridge Capital's bridge loan page explains the process. It can't promise approvals, rates or closing timelines.
FAQ
How much will a HUD 223(f) loan pay off at the end of a bridge?
At most the lowest of HUD's tests, which are ceilings rather than a promised amount. In the example above, the 80% refinance cap decided it when the plan worked, and NOI decided it when income ran 20% short.
How common are apartment loan maturities and delinquencies right now?
"Thirteen percent of mortgages backed by multifamily properties will mature in 2026," according to the Mortgage Bankers Association. Trepp data reported by Multifamily Dive put the multifamily CMBS delinquency rate at 7.69% in August 2026. Neither figure measures bridge lending, so treat them as background; your exit depends on your own collected revenue, operating history and repairs meeting the takeout's tests in time.
What if the bridge matures before the property qualifies for the takeout?
If the property qualifies but the takeout lends too little, pay the bridge down to what it will lend. If the property doesn't qualify yet, because work is unfinished or the operating history is short, a paydown won't fix that: meet the extension tests and pay any extension charge, repay from other cash, sell, or refinance into another bridge if a lender will make one.