| Detail | Explanation |
|---|---|
| Lender type | Private, non-bank lender |
| Capital from | Institutional and private investors, often with added fund-level borrowing |
| Typical loans | Bridge, construction, transitional, and some mezzanine loans |
| Common rate structure | Floating, priced as a spread over SOFR |
| Recourse | Often non-recourse with carve-outs, varies by lender |
How does a debt fund get its money?
Investors commit capital to the fund, and the manager lends it out under a stated strategy. Many funds increase their lending capacity with fund-level borrowing, such as warehouse or repurchase facilities, and some later pool loans into commercial real estate CLO securitizations. The fund earns the spread between what borrowers pay and what its own capital costs.
That structure explains the pricing. Investor capital expects a higher return than bank deposits, so a debt fund loan usually costs more than a bank loan on the same property. In exchange, the fund can take on business plans a bank or a CMBS lender would decline.
What kinds of loans do debt funds make?
Every fund has its own box for asset type, geography, loan size, and sponsor profile. The types of commercial real estate lenders guide compares debt funds with banks, life companies, agency lenders, and CMBS.
- Bridge loans on properties with vacancy, below-market rents, or a planned renovation
- Construction loans, including projects too large for a single community bank
- Loans sized to future value, with renovation dollars funded as work is completed
- Mezzanine loans and preferred equity behind another lender's senior loan
- Rescue capital to pay off a maturing loan that cannot be refinanced conventionally
How does a debt fund size a transitional loan?
Debt funds often lend on total cost and fund part of the loan later. The initial advance covers part of the purchase price, and a future funding component pays for renovation or leasing costs as they are incurred. The loan is usually tested against loan-to-cost and the as-stabilized value, with an exit tested against the debt yield a permanent lender would require.
In this hypothetical example, a sponsor buys a property for $12,000,000 and budgets $3,000,000 for renovations, a total project cost of $15,000,000 before closing costs. The fund's assumed limit is 75% of total cost. Figures are illustrative only.
| Component | Amount | Note |
|---|---|---|
| Total loan at 75% of cost | $11,250,000 | Sized on purchase plus renovation |
| Future funding for renovation | $3,000,000 | Drawn as work is completed |
| Initial advance at closing | $8,250,000 | 68.75% of the purchase price |
| Sponsor equity at closing | $3,750,000 | Purchase price less initial advance |
What should a sponsor check before choosing a debt fund?
Capital Partners compares debt fund terms against bank and other private options on the same request, so the choice is made on the full cost and the business plan. Run the loan sizing calculator first, then submit your deal for a review.
- Extension options, the tests to qualify for each, and whether a new interest rate cap is required
- How future funding draws are approved and how quickly they are paid
- Exit fees, minimum interest, and prepayment terms
- Whether the fund holds the loan or sells or finances it after closing
Common questions
Is a debt fund the same as a hard money lender?
They overlap. Both are private non-bank lenders. Debt funds are usually larger, institutionally capitalized, and focused on bigger transitional loans, while hard money lenders tend to lend smaller amounts based mostly on property value.
Are debt fund loans more expensive than bank loans?
Usually yes, because the fund's investors expect a higher return than a bank pays on deposits. The higher rate buys flexibility, speed, higher leverage, or a willingness to lend on a property that is not yet stabilized.
Do debt funds lend on construction projects?
Many do. Some specialize in construction and will finance larger or more complex projects than local banks, often on a floating rate with an interest reserve built into the budget.
How do I refinance out of a debt fund loan?
Most debt fund loans are planned as short-term bridges. Once the property reaches stabilized occupancy and income, the sponsor refinances into a permanent loan sized on the new cash flow, or sells the property.
Send this deal to a principal
Share the basics now. A principal responds within 1 business day, and you can send the full package after the first conversation.