Debt Fund & Private Credit: Bridge, Mezzanine & Transitional

When to Use a Debt Fund vs. a Bank Bridge

Many borrowers default to their existing bank relationship for bridge and transitional financing, often because they do not realize that a debt fund can deliver a materially better outcome. Here is a head-to-head comparison of the two approaches.

Choose a debt fund when: Speed is critical (acquisition deadlines, competitive situations), you need higher leverage than a bank will provide, your deal involves a property type banks are avoiding (hotels, office, retail), you need structural flexibility (future funding, interest reserves, earn-outs), or you do not have an existing bank relationship with bridge capacity.

Choose a bank bridge when: You have an existing deposit relationship and the bank can offer a competitive rate, speed is not the primary driver, the deal fits comfortably within bank parameters (65-70% LTV, strong property type, strong market), and the lower rate and fees produce a meaningfully better total cost of capital over the expected hold period.

Debt Fund Rate Structures & Fee Economics

How Debt Fund Pricing Works

Debt fund loans are floating-rate, priced as a spread over SOFR (Secured Overnight Financing Rate), which replaced LIBOR as the benchmark rate in 2023. The all-in rate equals the current SOFR rate plus the fund's spread. With SOFR at approximately 4.35% in Q1 2026:

SOFR Floors

Most debt fund loans include a SOFR floor, a minimum base rate regardless of where SOFR actually trades. Typical floors are 2.00%-3.50%. If SOFR drops to 3.00% but your floor is 3.50%, you pay 3.50% + spread. In the current rate environment where SOFR is above most floors, this is academic. But if rates decline significantly, the floor becomes a real cost. Negotiating the lowest possible SOFR floor is a meaningful lever in the term sheet negotiation.

Origination Fees

Debt funds charge origination fees (points) at closing: typically 1.00-2.00% of the loan amount for senior bridge, 1.50-2.50% for stretch senior and construction, and 1.00-2.00% for mezzanine. On a $20M bridge loan, 1.50 points equals $300,000, a significant cost that must be factored into the total return analysis. Some funds charge fees on the full committed amount (including unfunded future advances); others charge only on the funded amount at closing with additional fees as future funding is drawn.

Exit Fees & Extension Fees

Exit fees: Some debt funds charge an exit fee (0.25%-1.00% of the loan balance) payable at repayment. This is separate from any prepayment penalty and is simply a cost of exiting the loan. Exit fees are negotiable, an experienced broker can often eliminate them or reduce them in exchange for a slightly higher spread.

Extension fees: Most bridge loans have a 2-3 year initial term with one or two extension options of 6-12 months each. Extensions are subject to performance tests (minimum DSCR, maximum LTV based on an updated appraisal, no event of default) and an extension fee of 0.25%-0.50% per extension period. Extensions are not automatic, if you do not meet the performance tests, the loan matures and you must refinance or sell.

Rate Cap Requirements

Because debt fund loans are floating-rate, many funds require borrowers to purchase an interest rate cap, a derivative contract that limits the maximum SOFR rate the borrower pays. For example, a SOFR cap at 5.00% means that even if SOFR rises to 7.00%, the borrower's effective SOFR is capped at 5.00%. Rate cap costs vary based on the strike rate, term, and notional amount, and have fluctuated significantly in recent years. As of Q1 2026, a 2-year SOFR cap at 5.00% on a $20M loan costs approximately $100K-$200K. This cost is paid upfront at closing and is a non-trivial addition to the total cost of the loan.

Debt Fund vs. Bank Bridge vs. Hard Money

How Commercial Lending Solutions Sources from 200+ Debt Funds

The debt fund market is fragmented and heterogeneous. Each of the 200+ funds we work with has a distinct lending mandate defined by multiple parameters: geographic focus (some lend nationwide, others prefer specific regions), property type preference (multifamily-only funds, industrial specialists, all-property-type generalists), deal size sweet spot ($5M-$20M, $15M-$50M, $25M+), leverage tolerance (conservative 65% LTV vs. aggressive 80%+ LTC), and risk appetite (light bridge only vs. heavy value-add and construction).

When a deal comes in, we match it against our database of active fund mandates to identify the 5-15 funds most likely to offer competitive terms for that specific deal. This matching process is relationship-based: we know which funds are actively deploying (some funds are fully invested and not quoting new deals), which have capacity constraints (a fund nearing the end of its investment period may offer more aggressive terms to deploy remaining capital), and which are adjusting their appetites (a fund that just had a construction loan default may temporarily pause construction lending).

This depth of relationships produces materially better outcomes than borrowers can achieve on their own. Most borrowers know 2-3 debt funds. We know 200+. The competitive tension between multiple funds bidding on the same deal consistently produces tighter spreads, lower fees, higher leverage, and more favorable structural terms than any single-source approach can achieve.

Related Property Types

Debt fund financing is available for all commercial property types, especially transitional and value-add assets.