CRE 101 · deweyluong.realtor

Construction Loans and Bridge Loans Explained: How Georgia Commercial Projects Get Financed Before the Income Starts

A finished, leased building can borrow against its income. A construction site and a half-empty building cannot — so they borrow against a plan instead, and the plan is what gets underwritten. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

Two loan types appear in almost every commercial project in Gwinnett and Metro Atlanta, and both work nothing like a normal purchase loan. A construction loan turns dirt or a tired building into a new asset. A bridge loan buys time while an existing asset becomes eligible for permanent financing. Both are short-term, both are interest-only for most of their life, and both share one decisive feature: the lender is not underwriting today's cash flow, because there isn't any — it is underwriting your plan and your exit. This page shows how each one actually works, works two complete examples you can check line by line, and covers the traps that kill projects in the final month. Every rate and ratio below is an assumption made up to teach the mechanics; real terms move with the lender and the market.

Construction loans: the lender pays for work already done, never work promised

• Progress draws. Unlike a purchase loan, which funds in full at closing, a construction loan funds in stages: the contractor completes a phase — foundation, framing, roof — the lender's inspector verifies it, and only then does the money move. Money never runs ahead of the work.
• Interest only, only on what is drawn. During the build you pay interest on the actual drawn balance, not the full commitment. That interest — the interest carry — is a real project cost and belongs in the budget from day one, exactly as the feasibility work should have sized it.
• A dual cap: LTC and LTV. The commitment is limited by both loan-to-cost (see the debt yield lesson's companion metrics) and loan-to-value against the completed, stabilized value. Whichever cap is lower governs.
• Retainage. The lender typically holds back about 5–10% of each draw until the project is complete and final inspections pass — its leverage to make sure the contractor comes back for the last punch-list items.
• Conditions before the first draw: permits issued, contract with a licensed contractor, builder's-risk insurance, and the borrower's equity in first or alongside — lenders are rarely the first money into a project.
• Completion guarantee. The sponsor usually signs personally for completion and repayment. For small developers, construction debt is effectively never non-recourse.

Bridge loans: buying time when the property is not yet permanent-loan eligible

• Typical uses: closing fast on a property a bank cannot underwrite in time; buying a building with heavy vacancy and leasing it up before refinancing; funding major repairs a permanent lender will not accept in current condition; or acquiring the next property before the current one sells.
• Exit-based underwriting. Because the property usually fails a permanent lender's DSCR test today, the bridge lender underwrites the asset's value at a lower loan-to-value — commonly around 65–75% — and the credibility of the exit: a sale, or stabilization followed by a refinance into a permanent loan.
• The price of speed: materially higher rates than permanent debt, plus origination points. That cost is rational only when the exit is firm and the holding period is short.
• Extensions are not free: most bridge loans offer an extension option, but it costs a fee and often carries conditions — for example a minimum occupancy. Missing maturity without an extension in hand is the single biggest risk in this product.

Worked example A — construction. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• A made-up ground-up small retail project in Gwinnett, 15,000 square feet: land $500,000; hard costs $1,500,000; soft costs (design, permits, legal) $180,000; contingency $100,000. Total project cost: $2,280,000.
• The lender commits at 70% loan-to-cost: a $1,596,000 loan, and $684,000 of borrower equity (30%).
• Over a 12-month build the drawn balance climbs from zero to the full commitment. At an average drawn balance of about 50% and an assumed 8.5% rate, interest carry is about $1,596,000 × 50% × 8.5% ≈ $67,830. The project's true cost is therefore about $2,347,830 — a budget that forgets the carry is short from the day ground breaks.
• Stabilized, assume NOI of $175,000. Yield on cost: $175,000 ÷ $2,347,830 ≈ 7.45%. Against an assumed 6.75% market cap rate, the development spread is only about 70 basis points — far thinner than the 150–250 point cushion the yield-on-cost lesson treats as the safety zone. Rents coming in just 10% light erase the development profit entirely.
• The exit: stabilized value at a 6.75% cap is $175,000 ÷ 6.75% ≈ $2,592,593. A permanent refinance at 65% LTV is about $1,685,185 — enough to retire the $1,596,000 construction loan with roughly $89,185 to spare before costs. Note what the exit depends on: the $175,000 NOI being real. Lower NOI means lower value, a smaller permanent loan, and cash the borrower must bring to the refinance table.

Worked example B — bridge. Also made up, same purpose.

• An investor buys a partially leased building for $1,200,000. A bridge lender funds 70% — $840,000 at an assumed 9.5%, interest-only: $79,800 a year, $6,650 a month. During lease-up that payment is carried by reserves, not by the building.
• Eighteen months later the building stabilizes at $110,000 of NOI. At a 6.5% cap rate it is worth about $1,692,308, and a permanent loan at 65% LTV is about $1,100,000 — enough to retire the $840,000 bridge in full and end the bridge period.
• If at month 18 the building is still not leased, the NOI — and therefore the permanent loan — comes in under $840,000, and the borrower covers the gap in cash or pays for an extension. That is maturity risk, priced in advance or paid in crisis.

The four traps

• Overruns are 100% yours: when construction costs run over budget, the lender does not automatically raise the commitment — the overage comes out of the borrower's pocket and the real LTC falls. A thin contingency is the number one cause of projects stalling mid-build.
• The rate floats: construction and bridge pricing is usually indexed. If market rates rise during your 12–24 month project, the carry rises with them — straight out of an already thin development spread.
• Starting the refinance late: a permanent loan needs 45–90 days of underwriting and closing. Filing at maturity instead of months before it hands the bridge lender all the leverage on extension terms.
• A one-legged exit: a plan that is only "sell it for X when finished," with no hold-and-refinance fallback, bets the whole project on one transaction at one moment. Experienced lenders ask about the second leg first — ask yourself before they do.

Which one, when

• Construction loan when the asset does not exist yet or must change fundamentally: ground-up, major renovation, conversion. Survival conditions: a real contingency, a capable contractor, and feasibility that still works with rents 10% below plan.
• Bridge loan when the asset exists but is not stabilized: speed to close, lease-up time, or repairs needed to qualify for permanent debt. Survival conditions: a specific, dated exit, and reserves to carry the loan to that exit plus at least six months of cushion.
• Neither when the deal only pencils in the best case. Short-term expensive money does not fix a bad deal — it makes the bad deal cost more and come due sooner.

Cho chủ doanh nghiệp và nhà đầu tư người Việt

Hai khoản vay này xuất hiện trong gần như mọi dự án thương mại ở Gwinnett nhưng hoạt động hoàn toàn khác vay mua tòa nhà đã ổn định, vì lender không thẩm định trên dòng tiền hiện tại — tài sản chưa có dòng tiền — mà trên kế hoạch và lối thoát của người vay. Vay xây dựng giải ngân theo tiến độ sau kiểm tra, chỉ tính lãi trên số đã rút, và bị chặn bởi cả LTC lẫn LTV; trong ví dụ trên, dự án giả định $2.280.000 vay được $1.596.000 ở mức 70% LTC, và chỉ riêng tiền lãi trong 12 tháng xây đã khoảng $67.830 — khoản mà nhiều ngân sách dự án quên mất. Bridge loan là vay ngắn hạn 6–36 tháng để "bắc cầu" qua giai đoạn tài sản chưa đủ chuẩn vay dài hạn: lãi cao hơn, thẩm định trên lối thoát, và rủi ro lớn nhất là ngày đáo hạn đến trước khi tòa nhà kịp ổn định — ví dụ khoản bridge $840.000 tốn $6.650/tháng chỉ trả lãi cho đến khi được tái cấp vốn ở mức khoảng $1.100.000.

Ba điểm cần nhớ trước khi ký bất kỳ khoản vay ngắn hạn nào: phần chi phí vượt ngân sách gần như luôn là 100% tiền túi của bạn; lãi suất thường thả nổi nên tiền lãi carry tăng theo thị trường; và hồ sơ tái cấp vốn phải bắt đầu 45–90 ngày trước ngày đáo hạn, không phải tại ngày đáo hạn. Bản tiếng Việt đầy đủ của chủ đề này có trên NhaDat Duluth: Vay xây dựng và bridge loan là gì? Đây là thông tin giáo dục chung, không phải tư vấn tài chính, đầu tư, pháp lý hay thuế.

Frequently asked questions

How does a commercial construction loan actually pay out?

Not in one lump sum at closing, the way a purchase loan does. The lender funds in progress draws: the contractor completes a stage of work, the lender's inspector verifies it, and only then does the money move. The borrower pays interest only, and only on the balance actually drawn, which is why interest during construction — the interest carry — has to be budgeted as a project cost from day one. The loan amount is also capped twice, by loan-to-cost and by loan-to-value on the completed project, and the lower cap governs. In the worked example on this page, a $2,280,000 Gwinnett project at 70% loan-to-cost supports a $1,596,000 loan, and the interest carry alone adds about $67,830 to the true cost of the project.

What is a bridge loan in commercial real estate, and when is it the right tool?

A bridge loan is short-term financing — typically 6 to 36 months — used when a property cannot yet qualify for a permanent loan but has a credible plan to get there: a half-empty building that needs lease-up time, a property needing major repairs, or a purchase that must close faster than a bank can move. Because the property usually cannot pass a permanent lender's DSCR test today, the bridge lender underwrites the exit instead — the refinance or sale that retires the bridge — at a lower loan-to-value, commonly around 65 to 75%, and at a higher rate with origination points. It is the right tool only when the exit is specific, timed, and funded with reserves to carry the loan past the planned exit date.

How much equity does a construction loan require?

Commonly about 25 to 35% of total project cost, which corresponds to a loan-to-cost of roughly 65 to 75%. In the worked example, 70% loan-to-cost on a $2,280,000 budget means $684,000 of borrower equity — and the lender typically requires that equity to go in first or alongside the draws, not last. First-time developers should expect the higher end of the equity range plus a personal completion guarantee; construction loans to small sponsors are almost never non-recourse.

What happens if a bridge loan matures before the property is ready?

That is the central risk of the product, called maturity risk. The borrower must negotiate an extension before maturity — extensions usually cost a fee, sometimes carry a higher rate, and often come with conditions such as a minimum occupancy. If there is no extension and no refinance ready, the loan is in default even if the project is otherwise sound. The defense is built at origination: start the permanent-loan process 45 to 90 days before maturity, not at maturity, and hold reserves that can carry the bridge at least six months past the planned exit.

Vay xây dựng và bridge loan khác nhau thế nào?

Vay xây dựng (construction loan) dùng khi tài sản chưa tồn tại hoặc phải thay đổi căn bản — xây mới, cải tạo lớn, chuyển đổi công năng: lender giải ngân theo tiến độ sau khi kiểm tra, người vay chỉ trả lãi trên số đã rút, và hạn mức bị chặn bởi cả LTC lẫn LTV sau hoàn thành. Bridge loan dùng khi tài sản đã có nhưng chưa ổn định — cần đóng giao dịch nhanh, cần thời gian cho thuê đầy (lease-up) hoặc sửa chữa để đủ chuẩn vay dài hạn: kỳ hạn thường 6–36 tháng, lender thẩm định chủ yếu trên lối thoát (bán hoặc tái cấp vốn) ở LTV khoảng 65–75%, lãi và phí cao hơn vay thường. Trong ví dụ trên trang này, dự án $2.280.000 ở Gwinnett vay 70% LTC được $1.596.000 và chỉ riêng tiền lãi trong thời gian xây đã khoảng $67.830; còn khoản bridge $840.000 ở lãi giả định 9,5% tốn $6.650/tháng chỉ trả lãi cho đến khi tòa nhà ổn định và được tái cấp vốn. Bản tiếng Việt đầy đủ: nhadatduluth.com — bài 'Vay xây dựng và bridge loan là gì?'. Đây là thông tin giáo dục chung, không phải tư vấn tài chính, đầu tư, pháp lý hay thuế.

This page is general education, not investment, legal, tax or financial advice, and not a projection or guarantee of any return. Every figure in the worked examples is made up and rounded to teach the mechanics; the loan amounts, interest carry, yield on cost, values and refinance proceeds were computed from the figures shown. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com