Financing Construction Projects: Why The Evolving Capital Stack Is No Obstacle To Getting Deals Done
High interest rates, compressed leverage and increased material costs have many claiming that ambitious commercial real estate projects do not pencil in today's environment.
Frank Montalto, managing director at IPA Capital Markets, a division of Marcus & Millichap, recognizes the challenges and negative perceptions. But don’t count him among the naysayers.
Montalto, who has been advising CRE principals and developers for nearly 10 years, acknowledged the dynamics of construction financing have changed since the pandemic shook things up.
“Historically, construction financing used to be a one-stop shopping experience where, if my clients were to develop a project, they'd call five of their balance sheet relationship lenders that would provide construction capital for their project at acceptable terms,” he said. “Historical market dynamics with abundant liquidity and relative certainty helped make deals pencil.”
Montalto said that not long ago, conventional bank financing could cover 70% to 75% of the overall construction project, requiring sponsors to inject 25% to 30% in equity.
“Put simply, enhanced leverage at a lower all-in cost of capital eliminated the need for subordinate financing products,” he said. “This reduced the interest reserve and mitigated additional equity injection, allowing developers to budget enhanced operating deficit capital to reduce project risk.”
Those days are gone, Montalto said.
Today's conventional financing typically provides 55% to 60% loan-to-cost capital. This poses a challenge for developers, introducing the need for mezzanine financing, preferred equity, Commercial Property Assessed Clean Energy financing or additional common equity, he said.
Montalto said he is spending “countless hours” advising clients about the availability of each additional tranche of capital and said he is optimistic that development projects can continue getting done to the benefit of their communities.
“Not every deal is going to pencil, which is something none of us can control, but too many deals are dying before they're born because many don't understand the alternative forms of financing that may be available,” Montalto said. “Many projects require some form of subordinate financing. This is where our team provides value.”
His opinions on the capital stack are more than theoretical. IPA has many deals in its pipeline that prove big deals can get done today, he said.
“Financing is a completely different animal in today's environment,” he said. “And yet we’re in the process of structuring or closing about $450M in construction financing.”
A Summer Of Big Deals
In July, IPA announced it had secured $30.5M in construction financing for a 244-unit multifamily development in Greensboro, North Carolina. Expected to be completed in spring 2026, the 17.8-acre development will feature three- and four-story garden-style apartments and a clubhouse.
“Given our volume and activity, we’re experts in creating a market around each project to procure market-leading capital structures to effectuate our client's business plan,” Montalto said about the deal.
Then, in August, IPA arranged and closed $25.5M in construction financing for a 107-unit senior housing community in Fayetteville, Arkansas. Montalto said IPA achieved 70% loan-to-cost with a regional bank at SOFR plus 3.1%, the result of canvasing more than 100 lenders and “leaning on deep-rooted lender relationships.”
Also this summer, IPA arranged the $72.2M refinance of La Vista City Centre, a master-planned multifamily, office and retail development in La Vista, Nebraska. Montalto said IPA obtained the most competitive pricing at a loan-to-value ratio of 70% while adhering to its client’s investment thesis, and it closed the deal in fewer than 50 days.
IPA is slated to close more than $100M in construction financing in September across 375 units in several markets. Montalto said one is a multifamily development at 60% loan-to-cost, with an additional 15% of the capital stack in the form of preferred equity.
Longstanding and extensive lending relationships and knowledge about the availability of capital helped secure financing, he said.
Filling In The Gaps
Montalto said such examples show it is possible to fill in financing gaps using alternatives to conventional financing. These products can include debt funds, subordinate mezzanine, preferred equity and C-PACE financing.
“We look at every available option and help our clients make the best decision based on risk-adjusted returns,” he said.
Montalto said success in today's environment boils down to working with a debt and equity adviser who understands how to increase developer yields by building a capital stack that is more complex than the industry was accustomed to just a few years ago, but which will help the client achieve its goals.
“My time spent today versus five years ago involves a far more advisory and exploratory approach early in every project, where I'm helping my client uncover feasible options to complete the capital stack,” he said. “To be successful today, you need an adviser who can truly speak up and down the stack to understand all of the options.”
This article was produced in collaboration between Institutional Property Advisors and Studio B. Bisnow news staff was not involved in the production of this content.
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