Understanding How CRE Projects Are Financed

Assume $17.5M of sponsor / limited-partner equity and $32.5M of senior debt: 65% loan-to-cost and 35% equity. This simple, relatively equity-heavy illustration is not a standard structure or evidence of safety. Loan-to-cost is not loan-to-value; appraised value may differ from cost.

Sponsor and LP equity share ownership economics under their agreement. Senior mortgage debt generally has priority over junior claims, subject to law. Mezzanine debt commonly relies on an ownership-interest pledge. Preferred equity has negotiated distribution and control rights; it is not automatically ordinary bank debt. Neither junior layer appears in this example.

Construction loans advance through approved draws; a commitment is not day-one cash. An interest reserve funds carrying costs, while contingency covers eligible overruns. Both can run out. Debt-funded interest increases the balance owed.

Bridge financing supports a transition; permanent financing generally depends on stabilized operations. Budget debt service through construction and lease-up, then test the amount a future lender could actually provide.

Even a hypothetical $50M loan creates no $50M profit: proceeds pay project uses and remain repayable. At refinancing or sale, account for debt, fees, reserves and other obligations before distributions. Returning contributed capital is different from earning profit.