A Bridge to Agency debt instrument is a type of short-term financing provided by lenders—typically banks or debt funds—to real estate developers or property owners. It serves as a temporary loan that “bridges” the gap between the current financing needs of a project and the anticipated long-term, lower-cost permanent financing from a government-sponsored enterprise (GSE) such as Fannie Mae, Freddie Mac, or HUD.
Key Features of a Bridge to Agency Loan:
Purpose:
- Used to acquire, refinance, or stabilize a multifamily or commercial property.
- Helps borrowers bring a property to a condition where it qualifies for agency financing (e.g., improving occupancy, completing renovations, or seasoning income).
Term:
- Typically short-term: 12 to 36 months.
- Often includes extension options.
Loan Structure:
- Interest-only payments are common.
- Higher interest rates than agency loans due to increased risk.
- May include exit fees or prepayment penalties.
Exit Strategy:
- The loan is repaid through the proceeds of a permanent agency loan once the property meets the underwriting criteria of the agency lender.
Lender Type:
- Often provided by lenders who also originate agency loans, ensuring a smoother transition to permanent financing.
Borrower Profile:
- Typically experienced real estate investors or developers with a clear plan to stabilize the asset.
Example Scenario:
A developer acquires a multifamily property with 75% occupancy and plans to renovate units and increase rents. The property doesn’t yet qualify for a Fannie Mae loan (which might require 90%+ occupancy and 1.25x debt service coverage). A bridge lender provides a 24-month loan to fund the acquisition and improvements. Once stabilized, the developer refinances into a long-term Fannie Mae loan.
