In today’s commercial real estate (CRE) marketplace, financing is becoming increasingly challenging with rising interest rates, tightening lending requirements, and uncertainty in the economy. Bank loans, a conventional source of financing, no longer have access and affordability, and developers have to seek alternative financing options in order to drive their ventures through.

Dov Hertz, a seasoned real estate developer, emphasizes the importance of thinking creatively when raising funds. “The days of banking purely with traditional bank loans are over,” Hertz clarifies. “To survive in today’s marketplace, developers have to utilize alternative financing structures that allow them to become flexible and competitive.”

Here’s a glimpse at a range of successful alternative financing options for commercial real estate developers.

Joint Ventures and Private Equity

Participating with private equity companies or institutional investors in a joint venture (JV) is one of the most successful alternative financing methodologies. Joint ventures allow developers to split the financial burden and use larger groups’ capital and expertise in a shared manner.

“Partnerships in a smart manner in today’s marketplace,” Dov Hertz advises, “allows developers to access funding with less use of excessive debt, and make ventures viable.”

Participating in a JV is most useful for big-ticket ventures, spreading financial risk and balancing developer and investors’ interests in a shared manner.

Mezzanine Financing

A mezzanine financing is a blended funding mechanism, combining both debt and equity, which allows developers to secure additional funding over and above what a conventional mortgage can deliver. Mezzanine financing is utilized in many instances to bridge a funding gap between a first mortgage and a developer’s contribution in terms of equity.

“Mezzanine financing puts a bridge in place for developers in a funding bind but not at full ownership expense,” Hertz explains. “It’s a terrific mechanism for unlocking capital with ongoing property control.”

Although mezzanine loans can have a high price tag, with added payments in terms of increased interest, mezzanine financing is flexible and speedy, a perfect alternative for developers in a funding bind for rapid access to funds.

Crowdfunding and Syndication

The rise of real estate crowdfunding platforms puts developers in a position to access a deep pool of investors interested in financing a property in exchange for an equity position, a position in debt, or both. Crowdfunding democratizes financing, with small investors participating in a big development. This offers developers an alternative source of financing: one not dependent on big private equity companies and big banks.

“Crowdfunding is revolutionizing developer financing forever,” Hertz observes. “Projects can obtain financing through a variety of investors who believe in a property’s potential, not big private equity companies and big banks alone.”

Similar in model, real estate syndication allows developers to raise funds through several accredited investors, creating a fund with a structured investment vehicle backing new development.

Tax Credits and Government Incentives

Developers can use a variety of government-sponsored financing programs, including Opportunity Zone incentives, New Markets Tax Credits, and Historic Tax Credits, providing financial incentives for community development, restoration, and redevelopment for a property’s economy.

“Sophisticated developers know how to use government incentives and tax credits to save dollars and make a property feasible,” Hertz observes. “They can make a big impact, particularly in a downturned marketplace.”

In addition, state and city governments often make grants, low-interest loans, and incentives for commercial real estate development in a specific location.

Seller Financing

In some instances, developers can secure seller financing deals in which financing comes directly from the property seller, not a bank. In such cases, this is a useful strategy in environments in which bank financing is challenging to obtain at a high cost.

Seller financing comes with flexible terms and fewer closing expenses, and therefore, it is an attractive alternative for developers in terms of minimizing initial capital outlays.

Convertible Debt and Preferred Equity

For developers wishing to secure funding with less loss of ownership, convertible debt, and preferred equity, deals can serve as useful tools.

Under convertible debt, investors lend money to a developer with a future option to convert the debt into an equity position.

Under preferred equity, investors receive a guaranteed return first, with common equity owners not seeing any profit distribution. Therefore, preferred equity is an ideal alternative for investors wanting security in terms of a guaranteed return.

Such structures grant developers access to funding with freedom in terms of ownership and profit distribution arrangements.

Conclusion

Now that traditional financing is becoming increasingly restricted, commercial real estate developers have no alternative but to use alternative financing options in an attempt to move their ventures forward.

From mezzanine financing and joint ventures to crowdfunding and tax incentives, today’s marketplace necessitates adaptability and inventiveness.

In Dov Hertz’s summation, “The best developers are the ones who can adapt to changing financial landscapes. Those who explore creative financing options will not only survive but thrive in this changing marketplace.”

By utilizing alternative financing options, developers can access new opportunities, mitigate financial risk, and effectively deliver their ventures to life.

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