Debt fund bridge loan or bank bridge loan

Why the two lenders behave differently

A bank funds a bridge loan with deposits and keeps it. It can be flexible on terms with a borrower it knows, but it is limited by capital rules, concentration screens and its own appetite, so it lends less and asks for a guarantee.

A debt fund or mortgage REIT funds its loans with borrowed money: repurchase lines from banks and CRE CLO bonds. Those funding sources set its rules. The loan must fit the line lender’s eligibility and the CLO’s tests, so the documents are tighter and the extension tests are precise, but the leverage is higher and the recourse is limited.

Worked deal: a $20 million value-add project

Illustration. A sponsor buys an apartment property for $17,000,000 and plans $3,000,000 of renovation, a $20,000,000 total cost. Over 24 months, assume each loan averages 90% drawn.

• Debt fund: 70% of total cost, $14,000,000, at 30-day average SOFR (3.90% (30-day average, October 30, 2026)) plus the largest public REIT’s coupon spread, about 6.98%, with a 1% origination fee. Non-recourse, with a completion guaranty.
• Bank: 60% of total cost, $12,000,000, at SOFR plus an illustrative 2.75%, about 6.65%, with a 0.75% fee. Full guarantee, operating accounts at the bank.

Two-year view (illustration)	Debt fund	Bank
Loan commitment	$14,000,000	$12,000,000
Sponsor equity	$6,000,000	$8,000,000
Interest over 24 months (about)	$1,759,000	$1,436,000
Origination fee	$140,000	$90,000
Total cost (about)	$1,899,000	$1,526,000
Personal guarantee	carve-outs and completion only	full

The debt fund costs about $373,000 more over two years and needs $2,000,000 less equity. That is roughly 9.3% a year for the extra capital, cheaper than most equity and close to mezzanine pricing, with no intercreditor agreement and no personal guarantee. Add a likely exit fee and extension fee on the debt fund side, and an interest rate cap on both, and recompute with your own quotes.

What each lender checks

Debt fund: the business plan and budget in detail, the sponsor’s record with similar projects, the as-is and as-stabilized values, the exit (who refinances or buys at the end), and whether the loan fits its repo line or CLO. Expect a rate cap requirement and reserves for interest and capital work.

Bank: the guarantor’s net worth, liquidity and global cash flow, the deposit relationship, the as-is appraisal, and how much room the bank has under its commercial real estate concentration screens. Bank conditions are loosening: Banks generally eased CRE standards in Q2 2026, with demand basically unchanged (Fed SLOOS, July 2026)³.

Where each one wins

The debt fund wins on larger loans with heavy capital plans, sponsors who will not or cannot sign full recourse, deals where the bank’s leverage leaves a hole, and time-sensitive closings with an institutional sponsor.

The bank wins on smaller loans, light renovation, sponsors with deposits and a relationship, and plans where low leverage is fine and the cheapest money matters most.

The costs people miss

• Exit fees on debt fund loans, sometimes waived if the same lender provides the permanent loan.
• Extension fees and tests. Read the test levels against your realistic timeline, not the base case.
• The rate cap, required by most debt funds and many banks, and repriced at each extension.
• Future funding conditions. Each draw on the renovation budget needs lender sign-off and an inspection; slow draws slow the work.
• Interest on unfunded commitments. Some debt funds charge a fee on the undrawn balance, and minimum-interest terms can cover the whole commitment.
• The bank’s deposit ask, and the covenants that come with a guarantee.

Planning a value-add business plan? Send the purchase price, budget and pro forma, and we will price debt fund and bank bridge options against the same plan.