Bridge Loans vs Agency Debt: When Each Makes Sense

Bridge debt blew up dozens of multifamily deals in 2023 and 2024. Operators who used floating rate bridge loans on stabilized properties got crushed when rates moved against them.

Agency debt was the safer choice but it has its own limitations. Here is when each actually makes sense.

What Bridge Debt Is

Bridge loans are short term financing, typically 24 to 36 months, used to fund acquisitions of properties that are not yet stabilized. They are usually floating rate, often SOFR plus a spread, with interest only periods.

They allow higher leverage than permanent debt. They allow closing on properties that agencies will not lend on yet. They are flexible. And they are expensive.

Bridge debt is built for transitional assets. Heavy value-add. Lease-up. Repositioning. Properties that need 12 to 24 months of work before they can support permanent financing.

What Agency Debt Is

Agency debt refers to loans from Fannie Mae and Freddie Mac. These are long term, fixed rate, non-recourse loans available on stabilized multifamily properties.

Typical terms. 5 to 10 year fixed rate. 30 year amortization. 65 to 75 percent leverage. Non-recourse to the borrower. The rate is generally 50 to 150 basis points lower than bridge.

Agency debt is built for stabilized assets you intend to hold for the long term. It is conservative, slow to close, paperwork heavy. It is also the safest debt structure in private real estate.

When Bridge Makes Sense

Heavy value-add deals where the property cannot support permanent debt yet. You need to renovate units, push rents, stabilize occupancy. Permanent debt is not available until those metrics are achieved.

Time sensitive acquisitions. Bridge can close in 30 to 45 days. Agency typically takes 60 to 90 days. If you are competing on speed, bridge wins.

Short hold strategies. If you intend to refinance or sell within 24 months, paying agency prepayment penalties is more expensive than bridge.

When Agency Makes Sense

Stabilized properties you intend to hold for the long term. Five to ten year fixed rate locks your cost of capital, removes interest rate risk, and gives you predictable debt service.

Conservative leverage strategies. Agency debt at 65 percent LTV with a 1.30 plus DSCR is the gold standard for downside protection.

Income focused strategies. If your investor base prioritizes stable cash flow over upside, agency debt with its predictable service costs delivers that profile.

The Trap Most Operators Fell Into

From 2020 to 2022, bridge debt was cheap. Floating rates were near zero. Operators used bridge loans to acquire stabilized properties, betting they would refinance into permanent debt at a similar low rate.

Then rates moved. Stabilized properties that should have been on agency debt all along were sitting on floating rate bridge with debt service that tripled. The properties did not change. The capital structure was wrong.

The lesson. Match the debt to the asset. Transitional properties go on bridge. Stabilized properties go on agency. Mixing them blew up a generation of underwriting.

Interest Rate Caps

If you are using bridge debt, the lender will require an interest rate cap. This is a separate financial instrument that pays out if rates exceed a certain threshold.

Caps are expensive. They can cost 1 to 3 percent of loan principal up front. They need to be renewed if the loan extends. They are a real cost that should be in the underwriting.

Bridge debt without an adequate cap is a bet on interest rates. That is not real estate underwriting. That is speculation.

The Operator Position

We use agency debt for almost everything. The properties we acquire are stabilized or near stabilized. We hold for 7 to 10 years. We value predictability over leverage.

For the one or two deals where bridge makes sense, we underwrite with the cap fully amortized and the refinance scenarios stress-tested at agency rates 150 basis points above current. If the deal does not work under that stress test, it does not get the bridge loan. That is the discipline that keeps you out of trouble.