The bridge loan process: from term sheet to close
The process starts with a term sheet. The sponsor submits a deal package, purchase contract or refinance information, current rent roll and operating statements, business plan, sponsor track record, and pro forma underwriting. Lenders quote indicative terms based on this package, and the sponsor selects one to move forward.
Once a term sheet is signed, the lender begins formal due diligence. Third-party reports (appraisal, environmental Phase I, property condition report) are ordered immediately. Legal documentation is drafted in parallel. Most bridge loans close within 30 to 60 days of term sheet signing, with the timeline driven by third-party turnaround more than lender process.
How proceeds are structured at closing
At closing, the lender funds initial proceeds equal to the agreed loan amount minus the interest reserve and any holdbacks. The interest reserve is calculated to cover debt service through the projected stabilization date. Future funding, for renovation, TI/LC, or lease-up capital, is held back and funded as the sponsor submits draw requests against completed work.
Future funding draws are typically funded monthly against AIA-style documentation. The lender's construction consultant inspects work in place, confirms completion against the budget, and authorizes the draw. This adds friction relative to a single-funded term loan, but it's what makes bridge debt work for value-add and repositioning business plans.
What happens at exit
At maturity, the sponsor either refinances into permanent debt or sells the asset. Most bridge loans include a debt yield test (typically 8-10%) and DSCR test (typically 1.20x-1.35x) at exit. If the asset meets the tests, the sponsor can refinance into agency, life-company, CMBS, or bank permanent debt. If not, the sponsor exercises an extension option (typically two six-month extensions with fees) or sells the asset.
Sponsors should plan their permanent debt strategy at term sheet, not at maturity. Knowing which permanent lender will take you out, and at what coupon and proceeds, is what makes the bridge work economically.
Frequently asked questions
- How are bridge loan interest reserves calculated?
- The interest reserve is sized to fund debt service from closing through the projected stabilization date, typically based on the loan's all-in coupon and the lender's underwritten interest-only period. Reserves are usually held by the lender and drawn down monthly.
- What's the difference between LTV and LTC on a bridge loan?
- LTV (loan-to-value) is measured against the current as-is value of the asset. LTC (loan-to-cost) is measured against the all-in cost basis including purchase price, renovation, soft costs, and reserves. Bridge loans are typically sized to whichever is the binding constraint.
- Can future funding be drawn for any purpose?
- Future funding draws are limited to the categories defined in the loan agreement, typically renovation hard costs, TI/LC, and lease-up reserves. Draws require lender approval and inspection, and are funded against completed work, not in advance.
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