Commercial Property Refinance or Bridge Loan: How to Decide
A commercial property refinance replaces your existing mortgage with a new loan, and the first test is whether a permanent lender will size that loan to cover your payoff, closing costs and required reserves. When it falls short, you may be able to extend with your current lender, if your note offers an extension or the lender agrees to one, take a bridge loan if you pass that lender's own underwriting, or add cash.
Key points
- A permanent loan that covers payoff, costs and reserves usually makes a bridge unnecessary.
- A bridge lender applies its own value, income and exit tests, and may still require your cash.
- Compare an extension and a bridge over the same period, including the cash the exit may need.
What are the steps in a commercial property refinance?
- Review the note: maturity, prepayment terms, extension conditions and the notice deadline.
- Assemble the package listed below.
- Get quotes and test the exit: each permanent quote should name the test that limits the loan. If they fall short, price an extension and a bridge side by side.
- Target funding ahead of the extension-notice deadline, so you know before it passes whether to send notice.
What should you compare on each term sheet?
Before you pay a deposit, compare recourse, amortization and interest-only period, prepayment terms, lockbox and cash-sweep triggers, written reserve and holdback release terms, and when the deposit is refundable.
How long does each stage take?
Hypothetical example: maturity is ten months out, with extension notice due three months before it (planning allowances, not market turnaround times).
| Months before maturity | Stage | Checkpoint |
|---|---|---|
| 10 to 9 | Note review and screening package | Package complete |
| 9 to 8 | Permanent quotes; extension and bridge terms | Exit test done |
| 8 | Term sheet and deposit | Term sheet signed (conditional) |
| 8 to 6 | Lender orders appraisal, Phase I, condition report | Reports delivered |
| 8 to 4 | Your counsel: title, survey, tenant estoppels, subordination, non-disturbance and attornment agreements (SNDAs) | Estoppels and SNDAs signed |
| 6 to 5 | Underwriting | Commitment letter |
| 5 to 4 | Loan documents and closing check | Net proceeds reconciled to a payoff statement |
| 4 | Target funding | Loan funded |
| 3 | Extension-notice deadline | Notice sent if not yet funded |
| 3 to 0 | Remaining term before original maturity | Funded by maturity, or an effective extension in place |
A refinance that slips past month 4 can still close before the original maturity. Sending notice on time only preserves the extension option. To stay outstanding past maturity you need an effective extension, which means meeting every extension condition (which may include no default, a paydown, a coverage test or a payment), or another funded way to repay. Have counsel confirm each condition, and whether notice binds you, before the deadline. Funding at month 4 is also a payoff before maturity, so confirm it falls inside your note's open prepayment period; if not, add any yield maintenance or defeasance cost to the math.
If your lender is a bank or other institution covered by the Interagency Appraisal and Evaluation Guidelines, "an institution or its agent must directly select and engage appraisers." With any other lender, confirm who engages the appraiser and whose report it accepts before anyone commissions one.
What should you prepare for a commercial property refinance?
Northern Ridge Capital, a debt broker (not a lender) on loans from $5M to $30M, lists what to have ready for a commercial property refinance. Your lender may add to it.
- Trailing 12 months of operating statements (last three broken out) and two to three years of annual financials
- A dated rent roll reconciled to leases and deposits, with concessions and arrears
- Leases, amendments and a lease expiration schedule
- Existing loan documents and a payoff statement
- Title policy, survey, prior Phase I and property condition reports
- A current insurance quote (not last year's premium), tax bills and capital spending history
- Entity documents, a real estate schedule and guarantor financial statements
How does a permanent lender size a commercial property refinance?
The OCC's Commercial Real Estate Lending handbook says underwritten net operating income (NOI) may assume market vacancy, above or below your actual vacancy, and deduct management fees and replacement reserves you don't pay in cash, aiming for a stabilized estimate. Those deductions alone can put it below your statements. Ask each lender:
- What vacancy and credit-loss allowance it applies
- Which deductions (management fee, replacement and leasing reserves) apply to which test
A lender may size one test on NOI and another on cash flow after reserves. Among the tests a lender applies, debt service coverage (DSCR), loan-to-value (LTV) and, where used, debt yield, the smallest result sets the most it will offer; other underwriting limits and credit approval can lower it. Confirm which tests each lender uses. The example below assumes the exit lender uses one income figure for both DSCR and debt yield, already net of its deductions.
When does an extension or a bridge fit?
When permanent quotes fall short of payoff:
- Take the extension if you can fund the paydown and leasing yourself, and lease-up should finish well before the extended maturity.
- Consider a bridge only if its exit clears payoff at a stressed rate and at stressed income (lease-up late or at lower rents), or you can cover the shortfall in cash, and spreading out your cash is worth the cost and balance your own comparison shows.
- Add cash otherwise, so a permanent loan covers payoff now.
How do the costs and cash of each path compare?
Hypothetical example: every figure is a round assumption, not market data.
- The loan matures owing $12,000,000. On $900,000 of in-place NOI, permanent lenders quote $9,000,000. Value is $16,000,000 as is and $20,000,000 as stabilized.
- NOI is $900,000 in year 1 and $1,100,000 in year 2, received evenly, reaching a $1,300,000 run rate at month 24. Interest is paid monthly.
- Leasing costs total $1,000,000 and are paid in halves at the end of months 6 and 12.
- Extension: 24 months, a $1,000,000 paydown at the start, fixed 7.0% interest only. You pay the leasing.
- Bridge: a $13,000,000 commitment funding the $12,000,000 payoff plus a $1,000,000 leasing holdback, drawn in halves at the end of months 6 and 12. It floats, held at 8.0% here, interest only on drawn funds, no cash sweep.
- Bridge limits: the assumed lender caps initial funding at 75% of as-is value and the full commitment at 70% of as-stabilized value. Initial funding is $12,000,000 ÷ $16,000,000 = 75%, at its limit. The full commitment is $13,000,000 ÷ $20,000,000 = 65%, inside its limit.
- Bridge closing: you pay a 1% origination fee on the commitment, a $100,000 rate cap and a $300,000 interest reserve for interest NOI doesn't cover. The holdback pays leasing when due; a real one may pay only after inspection.
Here lease-up, the extension and the bridge all end at month 24, with no slack. A real plan needs months between stabilization and maturity, since an exit lender may underwrite trailing income rather than the month-24 run rate.
The bridge costs about $710,000 more and leaves $2,000,000 more debt, but ties up about $1,070,000 less of your cash by month 24.
| Over 24 months | Extension | Bridge |
|---|---|---|
| Interest | $1,540,000 | $2,020,000 |
| Bridge lender's 1% origination fee | None | $130,000 |
| Rate cap | None | $100,000 |
| Financing expense | $1,540,000 | $2,250,000 |
| Debt at month 24 | $11,000,000 | $13,000,000 |
This excludes leasing, legal, title and report costs.
On the bridge, NOI of $75,000 a month in year 1 falls short of interest of $80,000 a month (about $83,333 after the first draw), so over year 1 the reserve pays $80,000 in total ($30,000 in months 1 to 6, $50,000 in months 7 to 12), leaving $220,000 at payoff. In year 2, NOI of about $91,667 a month exceeds interest of about $86,667, leaving you $60,000. The extension's interest, about $64,167 a month, leaves you $130,000 in year 1 and $330,000 in year 2.
| Running totals | Extension | Bridge | Difference |
|---|---|---|---|
| Your cash put in at closing | $1,000,000 | $530,000 | $470,000 |
| Leasing you pay at months 6 and 12 | $1,000,000 | None | $1,000,000 |
| Total you put in | $2,000,000 | $530,000 | $1,470,000 |
| Property cash flow after interest, by month 24 | $460,000 | $60,000 | $400,000 |
| Net cash out at month 24, before the exit refinance | $1,540,000 | $470,000 | $1,070,000 |
The unused $220,000 reserve is still yours, but it comes back only through a payoff credit the bridge lender confirms in writing, or a release after payoff. Until then, count it as tied up.
How do you test the exit before you sign?
The hypothetical month 24 lender requires a 1.25 DSCR on 30-year amortization with monthly payments, a 9.5% debt yield and 70% LTV. Its 1% origination fee and $200,000 of closing costs and reserves come out of proceeds.
Will the exit lender accept the income and value?
Get the exit lender's answers in writing:
- Which new leases must be paying rent, not just signed
- How free rent is treated, and whether it must have burned off
- What proof of collected rent it wants (deposits, tenant ledgers)
- How many months of collections at the new rents it needs, and whether it sizes on trailing income or a run rate
- Whether the appraiser can support the stabilized value on that history
What loan does the exit support?
- DSCR: $1,300,000 ÷ 1.25 = $1,040,000 of annual payments. Divided by the loan constant, the annual payment per dollar borrowed (about 7.58% at a 6.5% rate, about 8.39% at 7.5%), that supports about $13,710,000 or about $12,390,000.
- Debt yield: $1,300,000 ÷ 9.5% = about $13,680,000 at any rate.
- LTV: $20,000,000 × 70% = $14,000,000.
| Exit case | Binding test | Loan | Net proceeds | Against $13,000,000 bridge payoff |
|---|---|---|---|---|
| 6.5% rate, $1,300,000 NOI | Debt yield | About $13,680,000 | About $13,350,000 | About $347,000 over |
| 7.5% rate, $1,300,000 NOI | DSCR | About $12,390,000 | About $12,070,000 | About $929,000 short |
| 7.5% rate, $1,100,000 NOI | DSCR | About $10,488,000 | About $10,183,000 | About $2,817,000 short |
At a 7.5% exit on $1,300,000, you need about $929,000 at closing if the bridge lender returns the reserve after payoff, or about $709,000 if it confirms a payoff credit. Once the $220,000 is back, your eventual cumulative net cash on the bridge path is about $1,179,000 ($470,000 by month 24, plus about $929,000, less the $220,000). The extension's $11,000,000 clears with about $1,071,000 of borrowing capacity to spare, which becomes cash only if that lender allows a cash-out.
If income also underwrites at $1,100,000, both paths need cash. The bridge needs about $2,817,000 at payoff (about $2,597,000 with a reserve credit), and the extension about $817,000. So on these inputs, choose the bridge only if you could fund both the rate stress and the income stress.
FAQ
How long does a commercial property refinance take?
In the hypothetical above, about six months from preparation to funding. Get each lender's schedule in writing and count back from a target funding date set ahead of the extension-notice deadline.
Can I refinance a commercial property before the loan matures?
Often, but check the note. A lockout bars payoff, and yield maintenance or a fixed penalty can make it expensive. Defeasance swaps your property for government securities as collateral, and the loan continues on them. If a real estate mortgage investment conduit (REMIC) holds your loan, 26 CFR 1.860G-2(a)(8)(ii) keeps it a qualified mortgage of the REMIC after defeasance only if:
- the substitute collateral is solely government securities
- the loan documents allow the substitution
- the lien is released to facilitate a sale or other customary commercial transaction, not to collateralize a REMIC offering with non-mortgage obligations
- the release is not within two years of the REMIC's startup day
Those are tax conditions. Ask the servicer early what release requirements and costs your loan documents add.
What happens if the refinance doesn't close by maturity?
At maturity the full balance comes due, and unpaid, the loan is in maturity default. Without a valid extension, you repay from other funds, sell, or ask for a modification the lender doesn't have to grant. The note may also add default interest and late charges, so read those clauses now.