The Anatomy of a Commercial Bridge Loan Extension Option
Transitional commercial real estate projects often take longer to stabilize than initially projected due to supply chain delays, contractor re-bidding, or slower tenant lease-up. Bridge loans accommodate this reality by offering 12-month extension options.
Borrowers often mistakenly view extensions as guaranteed rights. In practice, an extension is a conditional option that requires satisfying strict financial covenants:
Standard Extension Conditions Precedent
- No Event of Default: Borrower must be in full compliance with all loan covenants, reporting deadlines, and tax payments.
- Timely Formal Notice: Borrower must deliver written notice of intent to extend 30 to 60 days prior to the maturity date.
- Payment of Extension Fee: Payment of a 25 to 50 basis point fee (e.g., $50,000 on a $10 million loan balance).
- Debt Yield or DSCR Hurdle: The property must achieve a contractual in-place Net Operating Income milestone.
- Replacement Rate Cap: Mandatory purchase of an extended SOFR interest rate cap matching the lender’s required strike price.