Distressed and Note-Payoff Bridge Loans

Common distressed bridge scenarios

• Maturing loans. A bank or CMBS loan comes due and the property no longer qualifies for a conventional refinance at the old balance, often because of lower occupancy or higher rates.
• Defaulted loans. The borrower is in monetary or covenant default and the lender has sent a demand or notice of default.
• Discounted payoffs (DPOs). The existing lender agrees to accept less than the full balance, and the borrower needs new money to fund the payoff by a set date.
• Note purchases. An investor buys the defaulted note itself, then works out, forecloses or negotiates a deed in lieu.
• Acquisitions out of distress: buying from a lender after foreclosure, from a receiver, or from a motivated seller facing maturity.

How lenders underwrite distress

Asset-based lenders focus on what the property is worth today and how they get repaid, not on why the prior loan went bad. They will want:

• As-is value and in-place income, with an honest explanation of occupancy and collections.
• A credible plan: new management, lease-up, renovation or sale.
• A full picture of what is owed: principal, default interest, late charges, legal fees, protective advances and any tax or mechanics' liens.
• Status of any litigation, foreclosure, receivership or bankruptcy filings.

Leverage is usually conservative. Many asset-based bridge lenders cap leverage around 65–75% of as-is value, and distressed situations often price at the lower end. A DPO can make the math work because the payoff, not the old balance, sets the loan size.

Discounted payoffs and buying notes

On a DPO, the bridge lender funds a payoff the existing lender has agreed to in writing. Get the payoff letter or DPO agreement with a firm amount, expiration date and release terms; most new lenders will not close on a verbal deal. Watch for deficiency or tax implications of debt forgiveness and get tax advice early.

When buying a note, the financing is secured by the note and its collateral rather than by a direct deed of trust. Fewer lenders do note-on-note financing, and they look at the enforceability of the underlying loan documents, the collateral value and the path to taking title.

Foreclosure, judgment, receivership and bankruptcy timing

• Foreclosure. Timelines depend on the state and on whether foreclosure is judicial or non-judicial. A scheduled sale date sets a hard deadline, and the payoff usually has to be funded before it, or the lender has to agree to postpone.
• Judgments and liens. Recorded judgments against the owner can attach to the property and must be paid or bonded off at closing for clean title.
• Receivership. If a court-appointed receiver controls the property, any refinance or sale typically requires the receiver's cooperation and often court approval.
• Bankruptcy. A bankruptcy filing triggers the automatic stay, and new financing generally needs court approval. Many bridge lenders will not lend into an active bankruptcy, and those that do will require counsel's involvement and court orders.

Procedures vary by state and by case. This is general information, not legal advice; work with experienced real estate and restructuring counsel.

Speed and what to have ready

Distressed deals are usually deadline-driven. To give a lender a chance at a fast close, have ready:

• Current payoff letter or DPO agreement, plus any forbearance or reinstatement terms.
• Notice of default, foreclosure notice or sale date, and any court filings.
• Rent roll, trailing operating statements and an explanation of the downturn.
• Title commitment showing all liens and judgments.
• Insurance in force and evidence that taxes are current or will be paid at closing.

See fast-close commercial bridge loans for what is realistic at 7, 14 and 21 days.

How to compare distressed bridge lenders

Not every bridge lender will touch an active default, a foreclosure deadline or a note purchase. On the compare page you enter the deal once, including how fast you need to close, and see every matching lender anonymously with max loan, rate, points, term and total cost. Pick up to three; your first pick has six business hours to confirm, which matters with a sale date on the calendar. Contact details are released only when a lender confirms. Free for borrowers. We are not a lender or broker. Check all-in cost with the bridge loan cost calculator.