Capital Structuring Strategies for Real Estate Deals in a Tight Credit Market

When traditional bank financing can’t get the job done, the right capital structuring strategies for real estate deals can mean the difference between sitting on the sidelines and closing your next acquisition. With lenders tightening standards and interest rates remaining elevated, real estate investors are being forced to think differently about how they fund their deals.

During a recent Real Estate Industry Update, Daniel Roccanti, CPA, and Kyle Paxton, CPA, shared valuable insights on creative ways investors are filling the financing gap. The discussion highlighted how seller financing, preferred equity and joint ventures are helping deals get done in a market where conventional lending often comes up short.

Why Traditional Financing Is Falling Short

Today’s real estate market is defined by what Roccanti and Paxton call a “deal desert.” It’s not that deals don’t exist. It’s that financing them through traditional channels has become significantly harder.

Interest rates have climbed several percentage points compared to a few years ago, and lenders are requiring stronger financials before approving loans. As Paxton explained, “I’m seeing tax returns get scrutinized in more detail by bankers. I’m seeing those personal financial statements torn apart.”

The result is a growing gap between what banks are willing to lend and what investors need to close a deal. That gap is where creative capital structuring comes in.

Seller Financing: Bridging the Price Gap

One of the most common strategies gaining traction right now is seller financing. In this arrangement, the seller becomes part of the capital stack, essentially lending a portion of the purchase price to the buyer.

Paxton noted that seller financing works best “when the seller has low basis and doesn’t need all that cash at closing.” From a tax perspective, sellers who finance part of the deal can spread out gain recognition over time rather than picking it all up in year one.

This approach is showing up across deal sizes. Paxton pointed to smaller transactions where a retiring business owner sells to a longtime employee who can’t secure full bank financing. “The business owner who’s trying to exit just wants that kind of retirement payment over time,” Paxton said, adding that the arrangement often works well for both sides.

For buyers, the key is simply asking. As Roccanti put it, “You’d be surprised just by asking that it might be” an option. Not every seller will agree, but in a market with limited buyer demand, many are more open to it than you’d expect.

Preferred Equity: Filling the Financing Gap

Preferred equity has become so widespread that Paxton observed, “It’s kind of almost the standard more often than not.” The tool allows investors to bring in capital that sits between senior debt and common equity, helping deals pencil when bank proceeds fall short.

However, both Roccanti and Paxton cautioned that preferred equity requires careful cash flow planning. Because preferred equity holders receive their returns first (often at a set rate like 8%), those obligations can compound over time if returns aren’t paid out immediately.

“It can look great, make your deal look great, and then you don’t realize when you’re looking at your waterfall, this could be a real problem. It’s gonna squeeze your cash in a few years,” Roccanti warned.

The takeaway isn’t to avoid preferred equity. It’s to model it honestly. As Roccanti summarized, “Preferred equity isn’t bad. It’s just you’re trading flexibility today for obligations tomorrow.”

Make Preferred Equity Work

Investors using preferred equity should pay close attention to how the preferred return accrues and compounds, whether their projected net operating income can support both preferred and common distributions, and the timeline for paying down the obligation. Running realistic cash flow projections that account for the compounding nature of unpaid preferred returns is critical before committing to this structure.

Joint Ventures: Bringing in the Right Partner

Joint ventures are also making a comeback, particularly in today’s tight credit environment. Roccanti described the classic JV model: one party brings the operational expertise while the other brings the capital.

“It actually goes back to old school real estate,” Roccanti said. “You got a 20-something-year-old up-and-coming, ‘I got no money, but I got time and energy.’ So what do I do? I need to find someone with capital.”

But at larger scale, JVs introduce governance complexity. When a capital partner comes into a deal, they’ll want a say in decision-making. As Roccanti pointed out, “You’re really not underwriting the property anymore, you’re underwriting the partnership.”

Paxton added that JVs are particularly common in 1031 exchange situations, where one party’s tax timeline can drive the structure of the deal. He also noted a “resurgence” in JV activity recently, driven by the flexibility they offer in keeping roles and economics clearly defined between parties.

Choose the Right Structure for Your Next Deal

There’s no one-size-fits-all answer when it comes to capital structuring. The right approach depends on the deal, the seller’s situation, the investor’s existing portfolio and the current financing environment. What’s clear from the conversation is that investors who limit themselves to traditional bank financing are going to miss opportunities or sit idle.

As Paxton summarized, “This is the timeframe that really separates the savvy real estate investors from the not so savvy real estate investors.”

For a deeper look at these strategies, watch the full Real Estate Industry Update episode.

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