Commercial Bridge Loans and Gap Funding Explained
How commercial bridge loans work, when to use them, and how gap funding such as mezzanine debt and preferred equity fills the shortfall in your capital stack.
Commercial Bridge Loans and Gap Funding: How Short-Term Capital Gets Your Deal Closed
Most commercial real estate deals don't fail because the property is bad. They fail because the timing is wrong. The permanent lender wants stabilized income you don't have yet, the seller wants to close in 30 days, or your existing loan matures before the business plan is finished.
Two tools solve most of these timing problems. A commercial bridge loan funds the period between where the property is today and where it needs to be for long-term financing. Gap funding fills the space between what your senior lender will advance and the equity you have. This guide explains both in plain terms, with our indicative bridge term sheet in the middle so you can see how the numbers work.
What a commercial bridge loan is
A commercial bridge loan is short-term debt secured by commercial property. It typically runs for one to three years, often with extension options, and is designed to be repaid by a sale or by refinancing into a long-term loan once the property qualifies.
The name describes the job. A bank or agency lender wants a stable, leased-up property with a proven income history. A bridge lender is willing to lend against a property that is in transition, such as a building being renovated, re-leased or repositioned, as long as there is a credible plan to get it to the point where permanent lenders will take over. Most bridge loans are interest-only, which keeps payments low while the business plan is underway.
When borrowers use bridge loans
Bridge financing is built for situations where speed or flexibility matters more than the lowest possible rate.
Value-add acquisitions
Buying a property with vacancy, below-market rents or deferred maintenance. The bridge loan funds the purchase and, often, the renovation budget, and is repaid once higher rents support a permanent loan.
Maturing loans
An existing loan comes due before the property can qualify for a new long-term loan at an acceptable size. A bridge loan repays the maturing debt and buys time to stabilize.
Fast or complex closings
Auctions, discounted note purchases, distressed sellers and short contract deadlines. Bridge lenders can often close faster than banks because they rely more on the asset and less on a lengthy committee process.
Lease-up and construction completion
A newly built or recently renovated property that has not yet reached stabilized occupancy. The bridge loan carries the asset through lease-up until it can be refinanced into permanent debt.
How a bridge loan is structured
Every bridge loan is negotiated, but most share the same building blocks. Knowing them helps you compare offers on the full cost, not just the headline rate.
| Term | What it means for you |
|---|---|
| Loan amount and leverage | Sized as a percentage of current value (loan-to-value, LTV) or total project cost (loan-to-cost, LTC). Some lenders also size against the value after the business plan is complete. |
| Interest rate | Usually floating, quoted as a spread over a benchmark such as SOFR (the Secured Overnight Financing Rate), sometimes with a rate floor. Fixed-rate bridge loans exist but are less common. |
| Term and extensions | A short initial term with one or more extension options, each usually subject to an extension fee and performance tests. |
| Payments | Most often interest-only. Some loans include an interest reserve funded at closing so payments are covered during renovation or lease-up. |
| Future funding | Part of the loan held back and released as you complete renovation work or sign new leases, often tied to approved budgets and inspections. |
| Fees | Origination fees at closing and, in some cases, exit fees at repayment. Add these to the interest rate to compare the true cost of competing offers. |
| Recourse and guarantees | Many bridge loans are non-recourse except for standard carve-outs, often called "bad boy" guarantees, covering fraud, unauthorized transfers and similar acts. Some lenders also require a completion guarantee. |
| Prepayment | Often a minimum interest period, after which you can repay without penalty. This matters because the whole point is to refinance or sell early. |
What bridge lenders look for
A believable exit. The single most important question in any bridge credit is how the loan gets repaid. Lenders want to see the refinance or sale case modeled with realistic rents, interest rates and capitalization rates, not best-case assumptions.
A business plan with a budget. Scope of work, contractor bids, a timeline and a leasing plan. Lenders fund against milestones, so the plan has to be specific enough to measure.
Sponsor experience and liquidity. A track record with similar properties and enough cash on hand to cover overruns. Liquidity and net worth tests are common, especially where guarantees are required.
Clean third-party reports. An appraisal, environmental report, property condition report and title work. Problems found late delay closings, so order them early.
A bridge loan is only as good as its exit. If rents, interest rates or values move against you, the refinance may come in smaller than planned, leaving a shortfall at maturity. Build a downside case before you sign, confirm the extension tests are achievable, and know where the gap capital would come from if you need it.
Why bridge lending matters now
A large volume of commercial real estate debt is coming due. The Mortgage Bankers Association reported in February 2026 that USD 875 billion, or 17% of the USD 5.0 trillion of outstanding commercial and multifamily mortgages, is scheduled to mature in 2026. Many of those properties will not qualify for a full refinance on day one, and short-term capital is one of the main ways owners buy time.
Non-bank lenders are meeting much of that demand. According to CBRE's Q2 2026 lending data, alternative lenders, including debt funds, accounted for 38% of non-agency commercial loan closings, ahead of banks at 30% and life companies at 21%. For borrowers, that means more choice, and more variation in terms from one lender to the next.
The indicative term sheet below shows how Financely structures a commercial bridge facility.
What gap funding is
Gap funding is capital that fills the space between what your senior lender will advance and the equity you have available. If a property costs USD 20 million, the senior lender advances USD 13 million and you have USD 4 million of equity, the missing USD 3 million is the gap.
Gaps appear for ordinary reasons. Senior lenders have become more conservative on loan sizing, construction and renovation costs have risen, appraisals sometimes come in below the purchase price, and a refinance at maturity may be smaller than the loan it is replacing. Gap funding lets a sound deal close without the sponsor giving up most of the equity to a new partner.
Where gap funding sits in the capital stack
The capital stack is the order in which each source of money is repaid. The higher a layer sits, the safer it is and the less it costs. Gap funding sits in the middle, between senior debt and common equity, which is why it is more expensive than a senior loan and cheaper than giving away ownership.
| Layer | Repayment priority and cost |
|---|---|
| Senior debt (for example a bridge or permanent loan) | Paid first and secured by a first mortgage on the property. Lowest cost in the stack. |
| Mezzanine debt | Paid after senior debt. Usually secured by a pledge of the ownership interests in the property-owning company rather than the property itself. Higher cost than senior debt. |
| Preferred equity | An equity investment with a fixed preferred return that is paid before common equity. Higher cost than mezzanine debt, but structured as ownership rather than a loan. |
| Common equity | The sponsor's and investors' capital. Paid last, takes the first loss and keeps the upside. |
Sources of gap funding
The right source depends on the property, the senior lender's rules and how much control you are willing to share.
Mezzanine loans
A subordinate loan secured by the equity in the borrowing entity. If the borrower defaults, the mezzanine lender can foreclose on that equity, often much faster than a mortgage foreclosure. Its rights against the senior lender are set out in an intercreditor agreement.
Preferred equity
Capital invested as equity with a priority return and, often, a mandatory redemption date. It is useful when the senior lender prohibits additional debt, because it does not sit as a loan against the property.
C-PACE financing
Commercial Property Assessed Clean Energy financing funds energy efficiency, renewable energy and resilience improvements through a property tax assessment. PACENation data shows USD 13.5 billion of cumulative C-PACE financing across 3,837 commercial projects from 2009 to December 2025. It requires senior lender consent and is only available where a state and local program exists.
Seller financing and credit support
A seller note carries part of the price and is repaid after the senior loan. In other cases, credit enhancement such as a standby letter of credit or guarantee can support a larger senior loan and shrink the gap itself.
Using a bridge loan and gap funding together
A common structure for a value-add deal pairs a senior bridge loan with a mezzanine loan or preferred equity. The bridge loan funds most of the purchase and renovation, the gap capital covers the shortfall to the sponsor's equity, and both are repaid when the property is refinanced or sold.
Agree the intercreditor terms early. The senior lender must approve any gap capital, and the intercreditor agreement decides who can do what if the deal goes wrong. Bringing in gap capital late, after the senior loan is documented, is one of the most common causes of delayed closings.
Model the combined cost. Gap capital is expensive. Your blended cost of capital, across senior debt and gap funding, has to leave enough room for the business plan to produce a return on equity. If it doesn't, the deal needs more equity or a lower price.
Match the maturities. The gap funding should not mature before the senior loan, and both should leave enough time to execute the business plan and refinance. A mezzanine loan that comes due a year before the property stabilizes creates a second maturity problem.
More debt means less margin for error. Every layer added to the stack raises the income the property must produce before the sponsor earns anything. Gap funding is the right answer when the business plan is sound and the shortfall is temporary, not when it is covering an overpriced acquisition.
How Financely structures bridge and gap capital
Financely is a debt advisory and arranging firm. We don't lend. We work for the borrower, and we do three things.
We size the full capital stack. We review the property, the business plan and the exit, and tell you plainly how much senior debt the deal supports and how large the gap really is.
We structure the layers to work together. We match the bridge loan with the right form of gap capital, line up maturities and coordinate intercreditor terms before documents are drafted, not after.
We arrange it with lenders who fit. We approach only lenders from our network of more than 12,700 verified capital providers whose mandate matches your property type, loan size and market. Learn more about our commercial real estate financing and private credit placement services.
Find out how much bridge and gap capital your deal supports
Tell us about your property and business plan and we will send you an estimate showing the scope of work and the fee to structure and arrange the financing. You decide whether to proceed once you have seen it.
P.S. If your loan matures in the next 12 months and the refinance numbers don't work, start now. The best bridge and gap terms go to borrowers who arrive with time on their side, not those who arrive a few weeks before maturity.
Frequently asked questions
What is a commercial bridge loan?
A short-term loan, typically one to three years, secured by commercial property that is in transition. It is repaid by refinancing into a long-term loan or by selling the property once the business plan is complete.
What is gap funding in real estate?
Capital that covers the difference between the senior loan and the sponsor's equity. It usually takes the form of mezzanine debt, preferred equity, C-PACE financing or seller financing, and sits between senior debt and common equity in the capital stack.
Is mezzanine debt the same as preferred equity?
No. Mezzanine debt is a loan secured by a pledge of the ownership interests in the borrowing entity. Preferred equity is an ownership investment with a priority return. The choice often depends on whether the senior lender allows additional debt.
Does my senior lender need to approve gap funding?
Almost always. Senior loan documents usually restrict additional debt and changes in ownership, and the senior lender and gap provider sign an intercreditor or recognition agreement that sets out each party's rights.
Is Financely a lender?
No. Financely is a debt advisory and arranging firm. We structure financing and arrange it with lenders from our network of more than 12,700 verified capital providers.
This article is for general information only and does not constitute legal, tax or investment advice. Any term sheet shown is indicative only and is not an offer or commitment to lend. Financely is an advisory and arranging firm, not a lender or broker-dealer. Any financing is subject to lender underwriting, due diligence, credit approval, documentation and conditions precedent, and no outcome or closing timeline is guaranteed. Market data is cited from the sources linked and was current at the time of writing.