A value-add bridge loan carries three loan-to-value figures and a loan-to-cost. Only one of them describes the lender's cushion if the plan stalls.
As-is LTV divides the loan by today's appraised value; as-stabilised LTV divides it by the value the property should have once the business plan is complete. On an illustrative value-add bridge loan with a $36.0M commitment, the same loan is 70.0 per cent of as-is value at closing, 90.0 per cent of as-is value once fully funded, and 64.3 per cent of the $56.0M as-stabilised value. Loan-to-cost is 75.0 per cent. The lender's real cushion sits between those numbers, not at the comfortable end.
Worked in full in The Real Estate Debt Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A fictional sponsor buys a half-let office building, refurbishes it and leases it up. The lender funds part of the purchase at closing and the capex as it is spent. Figures are illustrative.
| Input | Value |
|---|---|
| Purchase price = as-is appraised value | $40.0M |
| Capex budget | $8.0M |
| In-place NOI | $2.00M |
| Stabilised NOI (appraiser's projection) | $3.64M |
| Stabilised cap rate | 6.50% |
| Lender limits: as-is LTV at closing / as-stabilised LTV / LTC | 70% / 65% / 75% |
As-is value = $40.0M (appraised today, in its current state)
As-stabilised value = stabilised NOI / cap rate = $3.64M / 6.50% = $56.0M
Total cost = $40.0M + $8.0M = $48.0M
The as-stabilised value assumes an 82 per cent increase in NOI. Every figure computed on it inherits that assumption.
LTC test: 75% × $48.0M = $36.0M
As-stabilised LTV test: 65% × $56.0M = $36.4M
Commitment = lower of the two = $36.0M; sponsor equity = $12.0M, 25 per cent of cost
Initial funding = 70% × $40.0M as-is = $28.0M; future funding = $36.0M − $28.0M = $8.0M, all of the capex
Excel: =MIN(Max_LTC*(Price+Capex),Max_Stab_LTV*Stab_NOI/Cap)
| Measure | Loan | Denominator | Ratio |
|---|---|---|---|
| As-is LTV, at closing | $28.0M | $40.0M | 70.0% |
| As-is LTV, fully funded | $36.0M | $40.0M | 90.0% |
| As-stabilised LTV | $36.0M | $56.0M | 64.3% |
| Loan-to-cost | $36.0M | $48.0M | 75.0% |
Debt yield tells the same story. On the $28.0M funded at closing, in-place NOI of $2.00M is a 7.14 per cent debt yield; on the fully funded $36.0M it is 5.56 per cent. Only after stabilisation does it reach 10.11 per cent. A loan that is underwritten at 64.3 per cent of one value and 10.11 per cent of one NOI is, once fully funded and until the space is let, a 90 per cent loan against the purchase-date value, earning a 5.56 per cent debt yield on the income that exists today.
Notice the order in which the money goes in. The sponsor's $12.0M is the gap between the $40.0M price and the $28.0M funded at closing, so all of the equity is in the building on day one. The capex is then funded 100 per cent by the lender, against invoices and a monitoring surveyor's sign-off. That structure is deliberate: the sponsor's equity is fully at risk before the lender's exposure starts to rise, and the lender's exposure grows from $28.0M to $36.0M only as the works that are meant to create the value are completed. A lender that let the borrower draw capex ahead of the work, or let equity come in last, would have the same ratios on paper and a much weaker position.
The as-stabilised LTV moves with two projections at once: the NOI the lease-up achieves and the cap rate at which it is valued.
| NOI vs plan | Cap 6.50% | Cap 7.00% | Cap 7.50% |
|---|---|---|---|
| Plan, $3.640M | 64.3 | 69.2 | 74.2 |
| −10%, $3.276M | 71.4 | 76.9 | 82.4 |
| −20%, $2.912M | 80.4 | 86.5 | 92.7 |
A 10 per cent rent shortfall and 50 basis points of cap rate, neither of them extreme, take the headline 64.3 per cent to 76.9. That is the refinancing problem in one cell: the takeout lender sizes on the value that exists at maturity, not the one in the original appraisal, worked in what NOI a bridge loan needs to refinance.
Reading the as-stabilised LTV as the lender's cushion. It is the cushion if everything goes to plan. The case that matters is the stall: the capex is spent, the building is refurbished, but the space is not let. Suppose that building appraises at an illustrative $44.0M. The fully funded loan is then 81.8 per cent of value, and the value can fall only 18.2 per cent before the loan is impaired, against the 35.7 per cent the as-stabilised figure implies. Credit committees that size on the stabilised test alone would have allowed $36.4M here, 91 per cent of as-is value, and 75.8 per cent of cost; it is the loan-to-cost test that keeps sponsor equity at risk ahead of the lender. The interest the borrower must carry through the lease-up is a separate line of the same underwriting, in how to calculate an interest reserve on a bridge loan.
A sizing and exit-test model for your own loans, with the inputs left blank, is in the free workbooks for this book.
There is no single figure; it depends on the lender, the asset and the plan. Illustratively, a lender capping as-stabilised LTV at 65 per cent and loan-to-cost at 75 per cent sizes the example loan at $36.0m, where the stabilised test alone would allow $36.4m. What matters as much is how far the stabilised value can fall: a 10 per cent NOI miss and a 50 basis point wider cap rate take 64.3 per cent to 76.9.
It should be quoted both ways. On the illustrative loan, $28.0m funded at close is 70.0 per cent of the $40.0m as-is value; the full $36.0m commitment, including $8.0m of capex funding, is 90.0 per cent of that same value. The fully funded figure against as-is value is the honest measure of exposure before the plan delivers.
LTV divides the loan by an appraised value; LTC divides it by the borrower's total cost, purchase plus capex. On the illustrative deal, $36.0m against $48.0m of cost is 75.0 per cent LTC, leaving $12.0m of sponsor equity, while LTV ranges from 64.3 to 90.0 per cent depending on which value is used.
This article is one calculation from The Real Estate Debt Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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