There’s no sugarcoating it: You need to be knowledgeable and well-connected to raise capital in a tough CRE environment.
Traditional banks certainly aren’t making it easy — their lending requirements are stricter than ever, and interest rates, as you might have heard, are not exactly low.
And since banks base the loan amount on a percentage of the property’s current appraised value, it’s harder to secure LTV financing now that property prices have dropped across many markets.
How do you keep projects moving against all odds? You’ll need to look beyond the usual sources.
Many alternative lending strategies can get your project across the line, as long as you know how to present the deal and structure the partnership.
Equity investors
You can ask equity investors to buy into your property in exchange for a stake in the profits.
Unlike traditional lenders who expect interest payments, equity investors instead want a portion of the net income and a share of the upside if you sell.
Many of them are seasoned real estate professionals, so they understand risk-adjusted returns and can evaluate your project based on its market position and exit strategy.
Your ability to raise equity will depend on who you know and how compelling your deal is.
Having a strong personal network can certainly help, but the structure of the investment matters just as much.
What to do to raise equity for a commercial property?
- You need something solid to show, so start by finding a CRE deal that’s hard to resist. If you can demonstrate a clear return profile, even experienced investors may be willing to back you.
- You also need to build trust and invest in relationships before you ask for funding. Join real estate groups and attend investor meetups to keep your name in circulation. People are far more likely to invest when they already know who you are.
- Ask around. Who funded the completed deals in your target area? Someone in your circle may already have access to the kind of investor you’re trying to reach.
- Don’t overlook institutions. Some funds are actively looking to increase their real estate exposure, but you’ll need to show that your project fits their portfolio strategy.
Joint ventures
You can also use a joint venture structure to bring in other investors and divide responsibilities on a single commercial property.
One partner might contribute the capital while another handles development, leasing, or property management, or you might share both roles, depending on the agreement.
You won’t necessarily need multiple investors or a formal syndicate to make this work.
One solid JV partner may be enough to finance your project.
Remember:
- The agreement should define exactly what each partner contributes and how profits are split, as well as what happens if the partnership ends. Bring in a legal adviser early to draft and review the terms.
- Will your partner be involved in operations? Make sure you’re on the same page. You need to trust how they manage risk and timelines.
Commercial property crowdfunding
If you’re looking to cast your net much wider and are open to having your project be scrutinized publicly alongside competing deals, look into commercial real estate crowdfunding.
This allows you to pitch your deal to literally hundreds or even thousands of potential investors online.
Many platforms only require a few hundred or a few thousand dollars to participate, so you can expect most crowdfunding investors to be retail investors who want to access institutional-grade deals but are only willing to contribute smaller amounts compared to traditional equity partners.
If you want maximum exposure for your project:
- Choose your platform carefully. Some are designed for residential flips and not for larger CRE deals, so make sure you know if they’ve previously funded deals similar to yours in terms of size or asset class. Some only allow accredited investors, and others allow non-accredited retail backers. Compare the terms and fees, too.
- Build a credible pitch. Crowdfunding is hypercompetitive; if you post your deal on a large platform, you’ll likely need to compete with dozens of other listings for attention. That’s why you have to present the deal very clearly. Be transparent about the risks of the project and avoid overpromising returns.
- Make sure your projected ROI and timeline match the market and the risk. Most platforms require you to post expected investor returns, so make sure you’ve run the numbers thoroughly.
- Get (very) loud. It’s not enough to post your deal — you should also make full use of email lists and social media to attract capital. The more eyes you manage to put on your deal, the better your chances of hitting your funding goal.
Commercial property syndication
CRE syndication is similar to crowdfunding as it lets you pool money from multiple investors into one structure.
But you control the investor group rather than relying on a public platform.
Your investors stay passive, but they share in the returns.
Syndicates can be long-term or short-term.
You can raise capital for just one deal or keep the structure open to invest in several projects over time.
If you’re the syndicator:
- Prepare a Private Placement Memorandum (PPM) that spells out the risks specific to the asset and the market, as well as the expected returns your project could generate/aims to deliver. The PPM should also list all fees and clarify how the deal is structured.
- Put together a team — with a broker, an attorney, and an accountant at a minimum — to help you set up the structure and stay compliant. Don’t cut corners here.
Private money loans for commercial real estate
Private CRE loans typically come from high-net-worth individuals or unregulated financial firms and are often easier to qualify for than traditional bank loans.
You’ll still need to show these investors that your deal makes sense, of course, but in general, they tend to care more about the asset itself than your credit score or your income history.
In exchange for fewer hoops, you’ll pay higher interest rates, and the property usually secures the loan as collateral.
To raise a private money loan:
- Try asking around within your network. Private lending is all about trust, after all; investors want to know who they’re dealing with and whether your deal is worth the risk.
- Do you have a track record? Use it. Build a short portfolio summary or business plan showing the successful deals you have completed in the past, along with your current assets.
Hard money loans for commercial real estate
Hard money lenders base the loan amount and terms almost entirely on the value of the asset and not your financial background, so it’s worth looking into if you don’t have strong credit or cannot document your income.
The great thing about hard money lenders is that they evaluate deals and release funding fast. But you’ll pay for that speed. Interest rates will be higher than traditional loans in many cases, and repayment terms will also be tighter. These loans work if you’re confident about refinancing or reselling the property.
To be sure:
- Read every clause so that you are aware of all the fees that might eat into your margins. Always check the prepayment penalties and renewal terms.
- Think long-term if you’re planning to fund multiple deals and build a relationship with a hard money lender. You’ll close faster and may be able to negotiate better terms once they see your consistency.
Wholesaling
Do you know how to spot undervalued properties? You contract a property at a discount and then assign that contract to an end buyer, pocketing the price difference.
You can also use transactional funding to temporarily purchase the property before reselling it within hours or days.
Either way, your job is to bring the deal together.
To make wholesaling work:
Secure a motivated buyer first before signing the initial purchase agreement or committing to a short-term loan.
Everything will fall apart if the end buyer decides to back out.
If you are taking out transactional funding, run the numbers carefully.
Does the spread between your buy and sell price cover your funding cost? If not, you’re better off walking away.
Private Capital Investors is a direct CRE lender
Looking to fund your next commercial real estate project outside of traditional lending routes?
Let’s talk.
At Private Capital Investors, we work directly with borrowers like you to structure deal-specific, flexible financing.
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