Bridge loans buy you time; permanent loans buy you certainty. Every financing decision involves trade-offs between flexibility and predictability. Short-term advantages can carry long-term risks, and optionality is only valuable if it can be executed without stress. The question is whether your plan can withstand scrutiny once seasoning, prepay costs, hedge exposure, and cycle risk are considered. To see when each loan type makes sense, let’s start with what bridge and permanent financing are designed to solve.
Bridge vs. Permanent: What They Solve
Bridge financing is purpose-built for transitional assets: incomplete lease-up, deferred maintenance, CapEx programs, or execution risk that traditional lenders won’t underwrite. Pricing typically floats (SOFR + spread), it proceeds key off loan-to-cost (LTC) and as-is value, and you’ll typically buy a rate cap and face extension tests tied to debt service coverage ratio (DSCR) or debt yield. The benefit is flexibility and draw structures; the cost is coupon volatility and shorter maturities.
Permanent financing prices off stabilized net operating income (NOI) and collateral durability. Life companies favor lower leverage and long fixed terms with prepay friction; agencies (multifamily) offer balanced leverage and flexible prepay later in term; CMBS can maximize proceeds but adds cash management and defeasance/yield maintenance.
The switch point is when stabilized underwriting (not pro forma optimism) supports take-out terms that lower all-in cost, smooth cashflow, and reduce execution risk more than the option value you lose by leaving the bridge.
How Lenders Decide if You Qualify
Permanent lenders focus on what’s verifiable today, not optimistic projections:
- Cashflow vs. debt – Can your property generate enough income to comfortably cover the loan?
- Loan size vs. property value – Is the loan reasonable compared to what the property is actually worth?
- Track record – Lenders want evidence rents are collected and leases are signed; they prefer seasoned, stabilized income.
If your property passes these basic checks, a permanent loan is possible. If not, you may need more seasoning, structure tweaks, or additional equity before a take-out works. Once you know your property clears these basic checks, the next step is understanding the real economics of each loan path.
The Math That Really Matters
Focus on total economics, not just coupons.
1. All-in bridge cost through exit.
Include floating coupon, cap premium amortized over hold, unused fees on delayed-draw, extension fees, and any cap renewal if your hedge expires before the likely exit. Translate cap renewal into percentage of NOI so it competes for cash alongside tenant improvements / leasing commissions.
2. Permanent take-out economics.
Include fixed vs. floating trade-offs, amortization vs. interest-only (I/O), prepay regime (defeasance, yield maintenance, or stepdowns), and release spreads if portfolio. Price a forward rate lock if offered and compare to cap + bridge carry for the same months.
3. Prepayment Friction Index (PFI).
PFI = net present value (NPV) of prepay at earliest exit divided by outstanding principal. Prepay structures can change real cost by 200–300 bps, so a lower PFI often justifies locking earlier.
Timing Cues: When “Extend and Pretend” Turns Into “Fix and Finish”
Coverage erosion is the first cue. If your base DSCR is fine but SOFR +200 bps plus a 10% NOI dip puts you below your internal floor (e.g., 1.20x), your extension may be theoretical and not practical once you price the new cap and meet the test. That argues for switching to permanent before the extension window, while cap costs are manageable and lender appetite is broad.
Second, watch the cap term mismatch. If the hedge expires before DSCR / debt yield extension tests and the cap renewal cost pencils above 5–7% of NOI, the bridge’s “flexibility” is now an expensive trap. A permanent loan with a fixed coupon and manageable step-downs can be cheaper on a risk-adjusted basis.
Third, the maturity ladder at the portfolio level matters. If a cluster of bridges mature in the same 12–18 months, staggering take-outs into permanent now can keep total maturities under 25–30% in any single year and reduce portfolio risk.
Case Example: The Switch Pays for Itself
The Situation
A 240-unit multifamily property worth $84M has a bridge loan with 18 months to maturity. The bridge is expensive and requires regular cap renewals, adding risk and pressure on cashflow.
Option A: Stay on the bridge
Renewing the cap for another year would cost ~$650K (~14% of NOI). Combined with tenant improvements and other costs, cashflow is tight, and the next renewal will create the same problem again.
Option B: Switch to a fixed-rate permanent loan
A five-year fixed-rate loan at 6.15% supports $59.8M in proceeds. No cap renewals, no extension tests, and predictable debt service.
The Outcome
Even if the permanent loan is slightly smaller than the bridge maximum, it:
- Eliminates $650K in cap costs
- Removes extension risk
- Improves stressed cash coverage (DSCR) from 1.18x → 1.28x
- Simplifies cash management and gives equity a more predictable runway
Switching early can save money, reduce risk, and give owners real flexibility on timing their exit.
Common Mistakes That Turn Bridges Into Cliffs
- Underestimating cap renewal cost. Cap prices are a function of level, tenor, and volatility. A quiet forward curve can still produce painful premiums if volatility elevates. Budget early; consider forward caps as insurance.
- Relying on pro forma without signed paper. Permanent lenders only count leases that are executed, not just planned. If your take-out hinges on them, front-load leasing resources and incentives so that commencements align with the underwriting window.
- Ignoring cash management friction. “Springing sweeps” are effectively hard sweeps if your plan runs tight. Model them explicitly; a trapped dollar is more expensive than a slightly higher coupon.
- Chasing maximum proceeds instead of runway. A few extra dollars of loan today can cost you an extension failure tomorrow. Optimize for probability of success, not theoretical LTV.
Bottom Line
Bridge loans create opportunity; permanent loans convert it into durable value. Make the switch once stabilized underwriting is in hand, hedge and extension math tilt from flexible to fragile, and the floating cost of carry outweighs the value of waiting.
If you want a second set of eyes, our team can help you evaluate term sheets, hedge quotes, prepay math, and portfolio exposure—turning what feels like a cliff into a smooth on-ramp for compounding value. Let’s talk.
