Commercial Real Estate Capital Raising & Funding Solutions

Understanding the Capital Stack

The Capital Stack refers to the different layers of debt and equity used to finance a real estate asset. Each layer has a different risk level and corresponding expected return.

Typically, the capital stack includes:

1. Senior Debt: The lowest risk layer, typically a traditional commercial mortgage or bank loan, with the first claim on the property's cash flow and value.
2. Mezzanine Debt: A higher-risk form of debt that sits below senior debt but above equity in the stack. It has a higher interest rate and may include equity participation.
3. Preferred Equity: An equity investment that has a preferential right to distributions (like profits from the property) before common equity holders, but is subordinate to all debt.
4. Common Equity: The highest risk layer, typically the owner's cash investment, which has the last claim on cash flow and value but the potential for the highest return.

Understanding how these layers combine is crucial for structuring financing for acquisition, development, or renovation.

Key Capital Raising Methods

While our site primarily focuses on commercial mortgages (Senior Debt), there are many other methods that contribute to the capital stack or serve as transitional capital:

• 1. Traditional Commercial Mortgages (Senior Debt)

  This is the foundational layer for many projects. Provided by banks, credit unions, insurance companies, or through securitized markets (CMBS). Used for purchasing, developing, renovating, or refinancing income-producing properties. Lenders focus heavily on the property's cash flow, Loan-to-Value (LTV), and Debt Service Coverage Ratio (DSCR). Acceptable LTVs vary by property type, typically ranging from 60% to 80%, or higher for owner-occupied properties.

• 2. SBA Loans (7(a) and 504)

  Government-backed loans, primarily for owner-occupied businesses. SBA 504 loans, in particular, are structured with a portion financed by a Certified Development Company (CDC) and another by a bank, enabling larger financing for business expansion. These can provide higher LTVs (up to 85% or 90%) for qualified small businesses.

• 3. Mezzanine Loans

  Used to supplement senior debt when additional capital is needed. These are higher-risk loans with high interest rates (10-20%+) and may involve equity participation. They typically have terms of 3-10 years and are unsecured or have a second-position lien. Providers include specialized firms.

• 4. Preferred Equity Investments

  This is an equity investment situated between debt and common equity in the capital stack. It provides leverage without diluting the common equity holder as much as selling pure equity might. Preferred equity investors receive a preferred return (10-15%+), typically exiting upon the property's sale or refinance. These investments offer flexible structuring but can have complex legal arrangements. Providers include private equity funds and REITs. Examples of firms providing this include Blackstone, CIM Group, PGIM Real Estate, Rockpoint Group, and Northwood Investors.

• 5. Private Equity / Joint Ventures

  Private equity funds often invest directly in commercial real estate projects or form joint ventures with developers or owners. These investors can provide significant capital for large or complex deals, including affordable housing projects. Some private equity funds or impact investors specifically focus on sectors like affordable housing or supportive housing (e.g., SRO properties). Firms mentioned include The John Buck Company, Jonathan Rose Companies, Enterprise Community Partners, L+M Development Partners, and Brightline Ventures.

• 6. Tax Credit Equity (e.g., LIHTC)

  For affordable housing projects, including some SROs, equity can be raised through programs like the Low-Income Housing Tax Credit (LIHTC). This involves investors who receive tax credits in exchange for providing equity capital. This equity is combined with debt financing from banks or other lenders.

• 7. Bridge Loans

  Short-term financing (6 months to 3 years) used to "bridge" a gap until permanent financing is secured or a property is sold. While debt, they serve as crucial transitional capital, often secured by property equity. They typically have higher interest rates (6-10%) and may be interest-only. They are useful for transitional assets needing quick funding. Providers include private investors and specialized companies.

• 8. Hard Money Loans

  Provided by private investors for short terms (1-3 years), often for fix-and-flip, distressed assets, or borrowers with poor credit. Approval is heavily based on property value rather than borrower creditworthiness. Like bridge loans, they serve as short-term capital for projects that don't qualify for traditional financing, but at higher interest rates (10%+ or 8-15%+). They are typically interest-only loans. Providers are private lenders.

• 9. Owner Equity / Down Payment

  The borrower's own cash contribution is a critical part of the capital stack. Required down payments typically range from 10-15% for owner-occupied, 20-25% for apartments, and 25-30% for other investment properties. A larger down payment results in a lower LTV, which is viewed as lower risk by lenders and can lead to better terms.

Who Provides Capital?

Capital for commercial real estate comes from a diverse range of sources:

Navigating Your Capital Needs

Determining the optimal capital structure depends on the property type, use case (owner-occupied vs. investment), financial strength, business strategy, and the project's specific goals (acquisition, development, renovation, stabilization, expansion). Lenders and investors will assess factors like property cash flow, borrower experience, creditworthiness, and the overall risk profile.

Finding the right combination of debt and equity can be complex. Working with experienced professionals who have access to a wide range of capital sources can help you structure the financing that best fits your project's needs.