Bridge lenders size rehab budgets line-by-line, hard costs (per-unit interior, exterior, common area), soft costs (architect, permits, third-party reports ), and a 5% to 10% contingency. Funded into a controlled rehab reserve, drawn against completed work via inspection. The LTC test caps total proceeds at 70% to 80% of (as-is purchase + rehab budget).
How the rehab-budget line items roll up to bridge sizing
The rehab budget is sized in three blocks: hard costs (interior unit renovation, common-area refresh, roof/HVAC/exterior capex, life-safety upgrades), soft costs (architect, permits, third-party reports, lender legal, title), and contingency (typically 5% to 10% of hard costs on cosmetic value-add, 10% to 15% on heavier repositioning). The lender wants a unit-by-unit budget on multifamily, suite-by-suite on office or retail.
Sources of evidence: a general-contractor bid (or an in-house construction-manager budget signed off by an owner-affiliate GC), a sponsor track record of comparable rehabs at similar per-unit cost, and a third-party PCA (Property Condition Assessment) that backs into the deferred-maintenance and life-safety estimates. Without those three, lenders haircut the budget or refuse to fund it.
The LTC (loan-to-cost) test caps total proceeds at 70% to 80% of as-is purchase plus rehab budget plus closing costs. The LTV test caps proceeds against an as-stabilized appraised value at 65% to 75%, but only after a discount for execution risk. The binding test is whichever is more constraining; on heavy value-add, LTC binds first.
Reserve mechanics: rehab funds are typically held in a lender-controlled escrow and drawn against completed work via on-site inspection. Owner-controlled reserves exist on lighter-rehab deals with strong sponsors but are less common. The construction-monitor inspection cost is a real soft-cost line item the sponsor pays.
Sources
- Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) · Board of Governors of the Federal Reserve System · 2026-Q1
- Semiannual Risk Perspective · Office of the Comptroller of the Currency · 2025-12
- NAIOP Research Foundation: Industrial Space Demand Forecast · NAIOP Research Foundation · 2026-Q1