| Detail | Explanation |
|---|---|
| Construction loan funds | Through draws after inspection of completed work |
| Bridge loan funds | Mostly at closing, with any renovation money held back |
| Construction sizing | Loan-to-cost and as-completed value |
| Bridge sizing | As-is value, cost, and as-stabilized value |
| Common exit for both | Permanent loan or sale |
How do construction loans and bridge loans compare?
Both loans are short-term and both expect a refinance or sale. What separates them is the collateral on day 1 and how money moves after closing. A construction lender is financing a building that will exist later. A bridge lender is financing a building that exists now and needs time or work to reach its next value.
| Feature | Construction loan | Bridge loan |
|---|---|---|
| Collateral at closing | Land, plans, permits, and a construction contract | An existing building, occupied or not |
| How proceeds fund | Monthly draws after the lender's inspector signs off | Mostly at closing, renovation holdback drawn later |
| Sizing tests | Loan-to-cost and as-completed value | As-is value, loan-to-cost, and as-stabilized value |
| Interest | Accrues on the drawn balance, usually paid from an interest reserve | Accrues on the funded balance from closing |
| When equity goes in | Typically all of it before the first loan draw | At closing, alongside the loan |
| Guarantees | Completion and carry guarantees, often repayment support | Carve-outs, sometimes completion or carry on the renovation |
| Key third-party work | Plan and cost review, contractor vetting, draw inspections | Appraisal, property condition report, rent roll review |
| Term | Build period plus a lease-up cushion | Business plan period plus extension options |
| Main risk the lender prices | Cost overruns, delays, and lease-up after completion | Leasing, renovation execution, and the takeout |
When does a project need a construction loan?
Ground-up development always does. So does a gut renovation, a change of use that requires vacating the building, or an addition large enough to need its own permits and general contractor. In those cases the lender needs the controls that come with construction lending: a line-item budget, a contractor agreement, a construction draw process with inspections and lien waivers, retainage, and an interest reserve that carries the loan until the building produces income.
Construction lenders underwrite 2 values: the cost to build and the value once complete. They also underwrite the sponsor's ability to finish if costs rise, which is why completion guarantees and contingency lines get close attention. The construction loans page covers the program in more detail.
When is a bridge loan the better tool?
A bridge loan fits a building that already works as a building. The property may be half leased, carrying below-market rents, overdue for new systems, or coming off a maturity the current lender will not extend. Tenants can stay in place while the sponsor upgrades units, re-tenants space, or improves operations.
Bridge loans also take out construction loans. A completed building still in lease-up often cannot support a permanent loan yet, and a bridge loan buys the time to reach stabilized occupancy. See bridge loans for how those programs are structured.
Where do heavy value-add projects fall?
Large renovations and conversions sit between the 2 products. Lenders classify them by the size of the scope relative to value, whether the building stays occupied, whether permits and a general contractor are required, and whether the use changes. Some bridge lenders will fund heavy renovation but impose construction-style controls such as budget review, draw inspections, and completion guarantees.
Expect the lender to treat the loan as construction once the scope reaches structural work, a full vacancy, or a change of use. Presenting the project in the right category from the start saves a round of re-underwriting.
Worked example: how interest accrues under each loan
In this hypothetical example, both loans carry a $20,000,000 commitment, a hypothetical 8% interest rate, and an 18-month business plan. The construction loan funds nothing at closing because the sponsor's equity goes in first, then draws rise evenly to the full $20,000,000, for an average balance of $10,000,000. The bridge loan funds $16,000,000 at closing and draws a $4,000,000 renovation holdback evenly, for an average balance of $18,000,000.
Interest over 18 months comes to $1,200,000 on the construction loan and $2,160,000 on the bridge loan. The draw structure is the reason construction loans can carry a smaller interest cost per dollar committed, and it is also why the interest reserve on a construction budget has to be modeled month by month.
| Hypothetical input | Construction loan | Bridge loan |
|---|---|---|
| Loan commitment | $20,000,000 | $20,000,000 |
| Funded at closing | None | $16,000,000 |
| Funded through draws | $20,000,000 | $4,000,000 |
| Average outstanding balance | $10,000,000 | $18,000,000 |
| Interest rate | 8% | 8% |
| Interest over 18 months | $1,200,000 | $2,160,000 |
Which one fits your deal
These hypothetical projects show how the choice usually plays out.
- Ground-up industrial on entitled land with a signed general contractor agreement: construction loan.
- An older office building converting to apartments that must be vacated and gutted: construction loan, or a bridge lender willing to run construction-style draw controls.
- A garden apartment property renovated unit by unit while tenants stay: bridge loan with a renovation holdback.
- A newly completed self-storage facility still leasing up as its construction loan matures: bridge loan to replace the construction loan until occupancy supports permanent debt.
- A shopping center re-tenanting a dark anchor box with modest landlord work: bridge loan.
- A land purchase with entitlements still pending: usually neither, since the property calls for land financing or equity until permits are close.
What should you settle before choosing?
Test the stabilized income against the loan sizing calculator before picking a structure. Capital Partners places construction and bridge financing from $1M to $100M. Submit the project with the budget, schedule, and business plan, and a principal will review which structure fits.
- Whether the building can operate during the work
- Whether permits, a general contractor, or a change of use are required
- How much of the budget is hard cost versus soft cost and reserves
- How long lease-up will take after the work is finished
- Which permanent lender or buyer is the realistic exit, and what it will need to see
Common questions
Can a bridge loan be used for construction?
For moderate renovation, yes, through a holdback funded as work is completed. For ground-up work or a gut rehab, most bridge lenders either decline or apply construction-loan controls such as budget review, inspections, and completion guarantees.
Can I refinance a construction loan with a bridge loan?
Yes. A bridge loan is a common takeout when a building is complete but not yet leased enough for permanent financing. The bridge lender sizes to the finished building and its lease-up plan.
Is a construction loan harder to get than a bridge loan?
Construction loans usually require more documentation, including plans, permits, a contractor agreement, and a detailed budget, plus completion support from the sponsor. A bridge loan on an existing building involves fewer moving parts, though the lender still underwrites the plan and the exit.
Do construction loans require more equity than bridge loans?
It depends on cost, value, and the lender. The bigger difference is timing. Construction lenders usually require the sponsor's full equity before the first draw, while a bridge loan's equity goes in at closing alongside the loan.
Do you pay interest monthly on a construction loan?
Interest accrues monthly on the amount drawn. On most construction loans it is paid from an interest reserve built into the budget, so the sponsor does not pay it out of pocket until the reserve runs out.
Send this deal to a principal
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