Bridge Loans in CRE: As-Is and Stabilized Debt Yield

The term sheet came in at $12 million — $2 million less than what the business plan required. The initial advance looked fine. The As-Is debt yield cleared at 8.2%. The problem was the holdback. When the lender ran the stabilized debt yield on the full $14 million commitment against the projected NOI after renovation, it came back at 6.9% — below their 7.5% floor. The lender had two choices: cap the holdback or decline.

They capped the holdback. The equity gap was $2 million.

Bridge lenders think about loan risk in two phases, and they underwrite both of them before issuing a term sheet. Understanding both phases — and how they interact — is essential for modeling bridge loan proceeds accurately.

What a bridge loan is

A bridge loan is short-term transitional financing, typically 2–3 years, used when a property cannot yet qualify for permanent financing. Common situations:

• Lease-up: the property is partially occupied and needs time to stabilize before permanent financing is available
• Renovation: the property requires physical improvements before income can support long-term debt
• Value-add repositioning: the business plan involves increasing rents above current levels through improvements or re-tenanting
• Conversion: the property is changing use (office to residential, retail to mixed-use)

Bridge loans are typically structured with two components: an initial advance funded at closing against current income, and a holdback (sometimes called a future funding facility) released in draws as the business plan is executed.

The two debt yield tests

Bridge lenders run two separate debt yield calculations because the risk profile changes as the loan commitment grows.

As-Is Debt Yield

As-Is Debt Yield = Current NOI / Initial Loan Advance

This measures whether today's income is sufficient to service today's debt. It is the floor the lender uses to ensure the property has some income cushion from day one, even before the business plan creates additional value.

If the current NOI is $700,000 and the initial advance is $9,000,000:

As-Is Debt Yield = $700,000 / $9,000,000 = 7.78%

On a 7.5% floor, this passes. The property produces enough current income to justify the initial loan.

Stabilized Debt Yield

Stabilized Debt Yield = Projected Stabilized NOI / Total Loan Commitment

This measures whether the completed business plan produces enough income to justify the full loan — initial advance plus all holdback proceeds. The stabilized NOI is the projected NOI after renovation, lease-up, or repositioning is complete.

If the total loan commitment is $12,000,000 and the projected stabilized NOI is $900,000:

Stabilized Debt Yield = $900,000 / $12,000,000 = 7.50%

On a 7.5% floor, this exactly clears. If the projected stabilized NOI came in at $870,000 instead:

Stabilized Debt Yield = $870,000 / $12,000,000 = 7.25% — fails

The lender would either reduce the holdback until the formula clears, or require a higher projected NOI from a more aggressive business plan — which the sponsor would need to justify with market evidence.

Why lenders apply the double test

The As-Is test protects the lender against the immediate risk that the property cannot service the initial advance. The Stabilized test protects against the exit risk — the risk that the business plan does not produce enough income to refinance into a permanent loan, which is the bridge lender's primary exit mechanism.

If a property cannot stabilize at a NOI sufficient to produce a viable permanent loan, the bridge lender becomes trapped. The CREFC standards that govern CMBS and institutional bridge lending both reflect this: stabilized debt yield is treated as a surrogate for permanent loan eligibility at exit.

How the holdback affects both calculations

The holdback is where the two tests interact. Increasing the holdback:

• Does not change the As-Is debt yield (the As-Is calculation uses only the initial advance)
• Lowers the Stabilized debt yield (a larger denominator requires higher projected NOI to clear the same floor)

This means the stabilized test always gets harder as the holdback grows. Borrowers who build an ambitious renovation budget that requires a large holdback need to pair it with a projected NOI large enough to justify the expanded commitment.

Example:

In scenario 2, the larger holdback fails the stabilized test on the same projected NOI. In scenario 3, the business plan justifies the larger holdback only if NOI reaches $1,000,000.

Bridge loans and DSCR: why IO makes DSCR look easy

Bridge loans are almost always structured interest-only during the loan term. An IO bridge loan at 8.5% on a $9,000,000 initial advance generates:

Annual debt service = $9,000,000 × 8.5% = $765,000
DSCR = $700,000 / $765,000 = 0.91x

The IO structure means DSCR is below 1.0x — the property's income does not fully cover even the interest payments. This is intentional: bridge lenders accept sub-1.0x DSCR coverage because the business plan is expected to improve income. But it is also exactly why debt yield is the primary credit test on bridge loans rather than DSCR. A 7.78% As-Is debt yield tells the lender the income cushion that exists per dollar lent, regardless of the IO structure.

The exit: how bridge lenders think about permanent financing

A bridge lender's primary exit is refinancing into a permanent loan. When the business plan is complete, the stabilized income should support a permanent loan large enough to repay the bridge. This is why the stabilized debt yield matters so much — it is a proxy for permanent loan eligibility.

If the permanent lender is a CMBS program with a 9.5% debt yield floor, the bridge lender might underwrite their own stabilized test at 8.0%–8.5% to allow for some conservatism — the borrower needs room between "what the bridge underwrites" and "what the CMBS lender will actually fund."

If the bridge stabilized underwriting comes in at 7.5% but the permanent lender requires 9.5%, the exit is mathematically impossible without bringing additional equity at refinancing. Bridge lenders who model this carefully will require the stabilized NOI to be high enough to clear the expected permanent loan floor — not just their own bridge floor.

How lenders underwrite the projected stabilized NOI

The stabilized NOI is not the borrower's business plan projection — it is the lender's underwritten version of it. Lenders apply the same adjustments as on any loan:

• Market vacancy factor on projected occupied units/space
• Replacement reserves on the renovated building
• Haircuts on ancillary income
• Conservative rent assumptions if market rents are the basis

If the business plan projects $950,000 of stabilized NOI after renovation, the lender may underwrite $860,000 after applying their standard adjustments. The stabilized debt yield runs on $860,000, not $950,000.

For more on how lenders rewrite NOI before running any formula, see Pro Forma vs Underwritten NOI. For the foundational definition of how NOI is calculated, that post covers the full formula and common errors.

Use the debt yield calculator to model both the As-Is and Stabilized tests simultaneously on your bridge deal.

Frequently asked questions

What is a typical debt yield floor on a bridge loan? Bridge loan debt yield floors vary by lender type and risk profile. Lighter value-add deals with strong sponsorship might see 7.0%–7.5% As-Is floors. Heavy value-add or opportunistic bridge programs may require 8%–9% As-Is and higher stabilized floors. CMBS-eligible bridge programs typically underwrite to a stabilized floor that approximates what the CMBS takeout will require.

Do both As-Is and Stabilized debt yields have to clear the same floor? Not necessarily. Some lenders apply a lower floor to the As-Is calculation and a higher floor to the Stabilized calculation, because the stabilized test is a better predictor of exit eligibility. Others apply the same floor to both. Always confirm both the As-Is and Stabilized floors with the specific lender before modeling proceeds.

What happens if the stabilized debt yield does not clear? The lender typically responds by reducing the holdback until the stabilized calculation clears. The sponsor then has three options: (1) increase equity to cover the reduced holdback, (2) revise the business plan to produce higher stabilized NOI, or (3) find a bridge lender with a lower stabilized floor.

How does the As-Is debt yield relate to the LTV at closing? The As-Is debt yield and LTV are tested simultaneously and independently. A property with a low cap rate and high purchase price may pass LTV (the purchase price supports the loan) while failing As-Is debt yield (the income is insufficient per dollar lent). Bridge lenders who rely only on LTV underwriting — collateral value — without testing the income cushion have historically experienced higher loss rates in downturns. Both constraints apply.

Can a Fannie Mae or Freddie Mac loan be used as a bridge exit? Yes, if the property is multifamily. Fannie Mae's DUS program and Freddie Mac's Optigo network both offer permanent financing on stabilized multifamily. The bridge strategy needs to produce stabilized income meeting their DSCR (typically 1.25x) and debt yield requirements. Agency programs have their own vacancy, reserve, and income underwriting standards that will differ from the bridge lender's — always model the exit on the permanent lender's underwriting, not on the bridge lender's stabilized assumptions.