How sponsors are using bridge loans to buy time until the recovery

But what happens if market conditions have not materially changed by the time these loans mature is a looming question.

Short-term loans have become a way for commercial real estate sponsors with fundamentally sound properties and strong business plans to buy a little more time, either to complete a business plan or wait for a more favorable interest rate environment.

But with expectations rising that the magnitude of rate cuts could be lower – and slower – than anticipated, lenders and borrowers are starting to plan for what could happen if loans originated today need to be refinanced in a market which does not look much different than it does right now.

“Before today, the classic bridge product was for sponsors who had to get from point A to point B, which would be stabilization and a longer-term, lower-rate loan,” says Ted Wright, an executive managing director at Atlanta-based servicer Trimont. “The bridge loan would allow the borrower to execute their business plan and the exit was not in question. But today, the exit is in question.”

The root of the problem is the actions the US Federal Reserve and other central banks have taken over the past 18 months to fight inflation. The Federal Reserve’s target rate has risen by more than 500 basis points, to a level of 5.25-5.5 percent since March 2022. This activity has had a knock-on effect on the cost of debt, cap rates, and valuations, Wright notes.

“If you took away the cost of funds we are seeing today, the sponsor would be executing on the plan”

Ted Wright 

Citing a hypothetical example of a sponsor who has obtained a short-term loan on a value-add multifamily property, Wright explains the higher cost of debt means that while the sponsor might have been able to complete renovations and re-lease the asset at the expected level, the property is still not stabilized.

“If you took away the cost of funds we are seeing today, the sponsor would be executing on the plan,” Wright says. “It is just that the cost of funds has quadrupled.”
Higher for longer

The commercial real estate market has yet to come to terms with the impact of the most significant interest rate tightening cycle on record, says Justin Curlow, global head of research and strategy at AXA IM Alts.

“I still feel that this being the most significant tightening cycle on record will come with ramifications,” Curlow says. “Everyone is recalibrating, but ultimately this is likely to tip economies into a recession, and we will see central banks respond. We are still anticipating rate cuts in the second half of next year, but the quantum of rate cuts is going to be half of what was anticipated at the beginning of the year.”

Matthew Murray, a director in the asset servicing team at London-based Mount Street Group, says there are still a significant number of wishful thinkers on the equity side who are hoping for a significant near-term rate cut.

“But there are no two ways about it,” Murray adds. “The market is likely to see a baseline interest rate of more than 5 percent for the next two or three years.”

Solving for the future

This rapid and extended increase in rates has meant a significant and well-documented decline in lending and investment activity, says Christoph Donner, chief executive, US, for PIMCO Prime Real Estate.

“We are getting to the end of the interest rate cycle, and we can speculate over whether there will be one more rate hike in the US, if there will be a recession and what the outcome of the US presidential election will be next year. But all it means is that there will be noise over the next 12 to 18 months that will make it hard for momentum to pick up,” Donner says.

At this point, most lenders are working with their borrowers to work through problems, PIMCO’s Donner says. “In situations in which values are still at an acceptable level, borrowers are extending loans. But lenders are in the driver’s seat.”

Philip Adkins, head of US real estate debt originations at Charlotte-based manager Barings, believes transaction volume will pick up in 2024.

“Much of the anticipated increase in activity will be predicated on the number of bridge loans that are coming up for maturity,” Adkins says.

“Many of those loans are not going to be able to be extended under their current structure. Existing lenders will likely be willing to work with their borrowers in instances where there is strong sponsorship on high-quality assets in solid markets, but lenders are going to require some sort of right sizing. Not every sponsor will be able to do that, which will force deals to market.”

There is a tried-and-true solution for what happens if loans mature into a market with conditions that are like today’s, and that is making sure there is a strong lender-borrower relationship, says Toby Cobb, managing partner and co-founder of 3650 REIT, a national mortgage lender.

“Those firms who have their own servicing, and the ability to engage with the borrower early, understand what the challenges are, and provide solutions that will have better outcomes, if for no other reason than the fact that every borrower has a limited number of resources and if you’re addressing problems first, you’re more likely to get the resources,” Cobb says.

If one of the first times a lender speaks to a borrower is the day the loan defaults or the day the borrower asks for an extension, the discussion will be a bad one. “But if you made the loan and have been servicing the loan, you will know who they are and you have a much higher probability of them saying, ‘I have challenges here, can you help us to figure this out?’” Cobb says. “Frankly, that was our experience in the pandemic. We had three loans go into non-accrual and every single one of them paid us back.”

Still, Cobb’s outlook is less than sanguine: “I think this will be materially worse for real estate in terms of total defaults and losses than during the GFC.”

Building bridges

Lenders are offering a variety of short-term structures to help borrowers bridge to a more stable environment. Here are three structures that are becoming more common.


In a blend-and-extend scenario, a lender will adjust the interest rate on a loan and ask a sponsor for additional collateral in exchange for a short-term modification.

“It’s a way for the lender and the borrower to keep the loan current for another year or two,” says John Vavas, a shareholder in the New York office of national law firm Polsinelli.

“The lender says, ‘I’m going to blend your rate up, you’re going to put a few extra dollars in as a reserve to cover me for interest shortfalls and we will extend the maturity for two years. The rate won’t be the rate we could get in today’s market, and we’ll charge you a modification fee and then put it all into a blender and extend the loan.’”


Bridge-to-bridge lending has emerged as borrowers are seeking to replace an existing bridge loan with another short-term financing rather than lock in permanent financing. Charles Krawitz, head of commercial lending at Chicago-based Alliant Credit Union, says the firm is fielding more requests of this kind. “The claim is, ‘We are now on the 10-yard line and almost in the end zone.’ While this is often true, there are also cases when getting in the end zone requires achieving rents that are disproportionate to the market,” Krawitz says.

Pay and accrual

Also known as deferred payment loans, pay and accrual loans allows borrowers to split interest payments into two parts, with the aim of bridging short-term financing issues and paying lower up-front financing costs, says Daniel Lisser, a senior director at New York-based advisory Marcus & Millichap Capital Corporation.

“The lender is willing to be flexible to originate a loan in a time of a higher rate environment,” Lisser says. “[The structure] saves on current cashflow, and from the lender’s point of view, they understand the borrower has this current cashflow problem.”