There is a financing gap growing in commercial real estate, and it is affecting investors in the $500K to $5 million deal range more than almost anyone else. Traditional bank lending — once the reliable backbone of small-balance CRE transactions — has become harder to access, slower to execute, and increasingly conservative in its terms.
For sponsors who have historically relied on a single bank relationship to close their deals, the current environment requires a fundamentally different approach.
The shift is not subtle. Bank lending volume for commercial real estate has tightened meaningfully over the past 18 months, driven by a combination of regulatory scrutiny, portfolio concentration concerns, and the lingering effects of higher interest rates on property values and cash flows. Many regional banks — the institutions that have traditionally served the sub-$5M market — are either pulling back entirely or narrowing their appetite to only the most conservative, fully stabilized transactions.
The question is not whether capital is available. It is. The question is whether you know where to find it and how to assemble it.
Understanding Why a Single Loan Is No Longer Enough
In the years before interest rates reset, structuring a commercial real estate deal was often straightforward. A sponsor would secure a senior loan covering 70% to 75% of the project cost, contribute 25% to 30% equity, and proceed to execution. That capital structure worked because rates were low, property values were rising, and lenders were competing for business.
Today, the math looks very different. Senior lenders are commonly underwriting to 55% to 65% loan-to-value on new originations, and in some cases even lower for transitional or non-stabilized assets. That means a borrower who needs $3 million in total capital for a project may only receive $1.8 million from a senior lender — leaving a $1.2 million gap that needs to be filled from other sources.
For investors in the $500K to $5M range, that gap can be the difference between closing a deal and losing it. And it is precisely where understanding the full capital stack becomes a competitive advantage.
The Layers of the Capital Stack and When to Use Them
Senior Debt: The Foundation
Senior debt remains the most cost-effective form of financing in the capital stack, and it should always be the starting point. Even in a tighter lending environment, strong sponsors with stabilized or near-stabilized assets can access senior financing from banks, credit unions, life insurance companies, and agency lenders at rates that are meaningfully lower than any other capital layer. The key is understanding that your senior lender's appetite may not stretch as far as it once did, and planning accordingly.
Mezzanine Debt: Bridging the Gap
Mezzanine financing sits between senior debt and equity in the capital stack and carries higher interest rates — typically in the 9% to 14% range — in exchange for a subordinated position. For deals where senior lending falls short, mezzanine debt can provide the additional leverage needed to close without requiring the sponsor to contribute disproportionate equity. Mezzanine lenders are often private debt funds or specialty lenders who are comfortable with transitional assets, lease-up scenarios, and value-add business plans.
The advantage of mezzanine debt is that it allows sponsors to maintain more of their equity for reserves, improvements, or additional acquisitions. The tradeoff is cost — and the need for a clear exit strategy, since mezzanine financing typically carries a two- to three-year term.
Preferred Equity: Flexibility Without Foreclosure Risk
Preferred equity has become one of the most actively used tools in the capital stack, particularly for sponsors who need to fill a gap but want to avoid adding more debt to the balance sheet. Unlike mezzanine debt, preferred equity is structured as an ownership interest rather than a loan, which means it does not carry the same foreclosure remedies. Preferred equity investors typically receive a fixed return — commonly in the 8% to 12% range — and priority over common equity holders in the distribution waterfall.
For small-balance investors, preferred equity can be particularly valuable in situations where senior lenders restrict additional debt but allow equity partners. It can also be a strategic tool for recapitalizations, where a sponsor needs to restructure an existing deal without triggering a full refinancing.
Private Credit and Bridge Financing: Speed and Flexibility
The private credit market has grown dramatically in recent years, and it now represents a significant share of CRE lending activity. Private bridge lenders, debt funds, and mortgage REITs are stepping into the space that banks have vacated, offering short-term financing for acquisitions, repositioning, and refinancing scenarios where timing is critical. These lenders typically underwrite to the asset rather than the borrower's balance sheet, which makes them accessible to a broader range of sponsors — including those who may not meet the tightened credit criteria of traditional banks.
Bridge rates are higher, often in the 8% to 12% range with origination fees of 1% to 3%, but the speed of execution and flexibility of terms can be worth the premium for the right transaction.
Assembling the Right Capital Structure for Your Deal
The most effective sponsors in this market are the ones who approach their capital structure as a design exercise, not a single phone call to a bank. Each layer of the stack serves a purpose, and the goal is to assemble a structure where the blended cost of capital supports the deal's return objectives while providing enough cushion to weather market uncertainty.
Consider a practical example. A sponsor is acquiring a 12-unit multifamily property for $2.5 million with a value-add business plan that projects $3.2 million in stabilized value after renovations. A traditional bank offers 60% LTV on the as-is value, providing $1.5 million in senior debt. The sponsor fills the remaining $1 million with a combination of $500,000 in preferred equity from a private investor and $500,000 in sponsor equity. The blended cost of capital is manageable, the bank is comfortable with the leverage, and the sponsor retains enough upside to make the deal worthwhile.
That kind of structuring requires more effort than a single loan application, but it is exactly what separates investors who are closing deals in this market from those who are sitting on the sidelines waiting for conditions to change.
The Role of Capital Advisory in a Complex Market
For investors who have not historically needed to navigate multiple capital sources, this environment can feel unfamiliar. The lending landscape is fragmented, and each capital provider — banks, debt funds, bridge lenders, family offices, preferred equity investors — operates with its own criteria, timelines, and structuring preferences. Understanding which sources are appropriate for a given deal, and how to present the opportunity in a way that resonates with each provider, is where experienced capital advisory becomes invaluable.
The cost of getting this wrong is not just a higher interest rate. It is a missed acquisition, a failed refinancing, or a capital structure that constrains the deal's performance for years. In a market where every basis point matters, having the right advisory support is not a luxury — it is a competitive necessity.
Capital structure is not just about getting a loan. It is about building a financial foundation that supports your investment thesis from acquisition through exit.
About Brookmont Capital Ventures
Brookmont Capital Ventures is a commercial real estate debt and equity advisory firm headquartered in Washington, DC. The firm provides capital structuring, financing strategy, and advisory services to real estate owners, developers, and investors across a broad range of asset types and transaction structures. Brookmont focuses on disciplined execution and long-term capital alignment for its clients. For capital advisory services, contact us at Jerry@brookmontcapital.net or visit brookmontcapital.net.
