Gap Financing is a term mostly associated with mortgage loans or property loans such as a bridge loan. It is an interim loan given to finance the difference between the floor loan and the maximum permanent loan as committed.

More specifically, gap financing is subordinated temporary financing paid off when the first mortgagee disburses the full amount due under the first mortgage loan. This is normal in a situation involving a permanent “floor-ceiling loan,” where the borrower does not meet a rent-roll requirement, and the first mortgagee funds only a floor amount, agree in to fund the balance in the event the rent-roll requirement is met within a stated period. In this case, the gap lender is often the construction lender. Where the gap lender has agreed prior to construction to make the gap loan, the document that ties together the construction loan, the gap loan, and the permanent loan is the buy-sell agreement. In this agreement, a special provision is inserted providing that if the permanent lender's rent-roll holdback is not fulfilled at the time for the permanent closing, the construction lender agrees to disburse, at a concurrent closing date, funds equal to the amount withheld by the permanent lender pursuant to its commitment. These gap funds are normally evidenced by a promissory note secured by a junior mortgage subject and subordinate in all respects to the permanent loan documentation. The gap documents usually state unequivocally that, in the event the rent-roll requirement is not met during the rent-roll period, the permanent lender still retains the right on demand to purchase the gap note and discharge of record any second mortgage held by the construction lender. The borrower normally assigns to the construction lender all funds that would otherwise be payable to the borrower in the event the rent-roll requirement is met, with the construction lender agreeing to reassign to the borrower all funds that would be payable pursuant to the rent-roll requirement at such time as the gap loan note is paid in full. In addition, the permanent lender usually requires that the temporary lender and borrower agree that no funds will be disbursed under the gap documents, except at the closing of the permanent loan.

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