Bridge debt is a date, not a rate

Bridge pricing gets all the attention because it is the number that looks alarming next to permanent debt. It is the wrong thing to focus on. A bridge loan is a dated instrument with a business plan attached, and the plan either produces an exit before the date or it does not.

The exit test

Take your stabilised net operating income. Capitalise it at a rate you would actually transact at, not the one in the offering memorandum. Apply the take-out lender’s loan-to-value cap, then apply their coverage floor at a rate two hundred basis points above today. The smaller of those two numbers is what will be available to retire the bridge. If it is less than the bridge, the bridge is too big.

Reserve for the extension, not the term

Interest reserves sized for the base term run out exactly when a slow lease-up needs them most. Size the reserve for the term plus the first extension option and the arithmetic stops being a cliff edge.

What actually goes wrong

• The renovation schedule slips by a quarter and the reserve does not cover the extra carry.
• The exit cap rate moves 50 basis points and takes 8% off the exit value.
• The take-out lender applies a debt-yield floor nobody modelled, and it binds below the loan-to-value test.