John Wilhoit

Mortgage debt serves its purpose, but a complete capital stack requires strategic thinking across all available funding levers.

Introduction

The assumption that a traditional mortgage is the only financial instrument required for a successful real estate development is limiting at best—and potentially project-killing at worst. Mortgage debt plays a central role in real estate finance, but it is just one possible component of a fully capitalized deal. While many mission-oriented projects must rely on grants or subsidies, filling out the capital stack of an income-producing property demands a broader view. If you’re developing or redeveloping real estate and haven’t explored alternative capital sources, then your project may already be at risk of delay, cost overruns, or non-completion. 

 At Cap Ex, we devote a good deal of time walking owners through the layers of funding required to get a project to the starting line — and the finish line. Below are five of the most utilized and dependable capital sources after mortgage debt. 

Mezzanine Debt

Mezzanine debt plays a specific role in real estate finance: it fills the often-sizeable gap between what a senior lender will provide and what a project requires to move forward. Positioned between senior debt and equity in the capital stack, it allows developers to increase leverage without giving up equity ownership too early or too cheaply. While it carries a higher interest rate, it enables forward momentum when traditional lending falls short. 

In essence, mezzanine debt is a flexible tool that supports scaling up projects or unlocking capital in complex financing environments. It’s particularly common in larger transactions, phased developments, or where timing demands capital faster than equity can be raised. Used correctly, mezzanine financing strengthens a project’s viability without unnecessarily sacrificing control. 

Example: A developer with $10 million in total project costs secured $6.5 million in senior debt, leaving a significant funding gap before the project can break ground. Instead of diluting ownership by bringing in another equity partner for the remaining $3.5 million, the developer raises $2 million in mezzanine debt. This layer of financing carries a higher interest rate but preserves more long-term value for the sponsor. With mezzanine funds secured, the developer only needs to contribute $1.5 million of their own capital to move forward. By doing so, they retain a controlling interest in the project and maintain greater upside upon stabilization and sale. The mezzanine lender receives fixed payments and has recourse only to the equity portion—protecting the developer from full personal liability while filling the essential funding gap. 

Mezz debt means forward momentum for projects with a gap in their financing.

Preferred Equity: Returns Without Voting Rights 

Preferred equity occupies a unique position in real estate finance: it functions like debt in that it delivers a fixed return, but it behaves like equity in its place in the capital stack and in its risk profile. Preferred equity holders are paid before common equity, but after all forms of debt. Crucially, preferred equity investors typically do not get a vote in operational decisions, which can be very attractive to sponsors. 

This type of capital is often used to “top off” a capital stack, allowing projects to proceed without giving away disproportionate upside. It enables sponsors to hold more ownership while still meeting the funding needs of the deal. For investors, the appeal lies in strong, stable returns with less risk than common equity assuming the underlying project performs as projected. 

Example: Consider a mixed-use development in an urban infill location requiring $20 million in total capital. The sponsor secures $13 million in senior debt and can contribute $3 million in equity, leaving a $4 million funding gap. Instead of offering more common equity and giving up profit share, the sponsor brings in a preferred equity investor to cover the remaining $4 million.  

 This investor receives a contractually defined 9% annual return, paid out of project cash flow, and sits ahead of the sponsor in the waterfall structure. However, they do not have voting rights and do not interfere with day-to-day decisions. This arrangement allows the sponsor to maintain control over the asset, meet funding requirements, and protect future upside without over-leveraging the property. 

Preferred Equity “tops off” the capital stack.  

Historic & New Markets Tax Credits: Incentivized Capital 

Tax credits can transform the economics of a deal. Historic Tax Credits (HTC) and New Markets Tax Credits (NMTC) are tools that bring equity into a project through government-sponsored programs. While neither is simple to administer, both represent real dollars that can be monetized or sold to help fund developments that meet specific criteria. 

HTCs reward the preservation and redevelopment of historically significant structures. NMTCs encourage investment in low-income or economically distressed areas. Both programs require proper compliance, experienced advisors, and upfront planning—but when executed correctly, they offset significant portions of development costs and attract mission-aligned capital partners. 

Example: A nonprofit acquires a century-old school building to convert into affordable housing. Because the structure qualifies as historically significant, the developer applies for Historic Tax Credits, which can offset up to 20% of eligible rehab costs. In addition, the property lies within a NMTC-eligible census tract. By partnering with a tax credit syndicator, the nonprofit raised $3 million in NMTC equity and another $1.5 million in HTC equity. These funds are injected into the capital stack and do not require repayment. Instead, they reduce the need for traditional debt and strengthen the project’s financial viability. The result: a mission-aligned redevelopment that preserves architectural value, enhances the neighborhood, and proceeds with significantly reduced financial risk. 

Tax credits attract mission-aligned capital partners.

Joint Venture Equity: Partnering for Progress 

Joint venture equity is about alignment. When a developer lacks the full equity contribution required by lenders, a JV partner can step in to fill the gap in exchange for a share of profits. These arrangements allow developers to leverage their local expertise, entitlements, or operational know-how, while the capital partner brings the funding. Note the difference between JV equity – that requires participation in upside profits – and preferred equity, that does not require participation.  

The key here is balance: JV equity is not free money. It comes with expectations, oversight, and participation. A capital partner will likely want to be involved in decision-making and will expect transparency, reporting, and discipline. When structured thoughtfully, JV equity can accelerate timelines, de-risk the deal, and provide shared upside. 

Example: A nonprofit hospital identifies a high-traffic parcel for a new medical office building to expand outpatient services. The hospital has entitlements, demand forecasts, and architectural plans in place, but limited development capital. A real estate investment firm focused on healthcare assets agrees to provide $8 million in equity capital as a joint venture partner. The hospital contributes the land and project team, while the capital partner handles underwriting, risk management, and a portion of construction oversight. Profits from lease-up and eventual sale are split based on a negotiated waterfall, often 70/30 or 60/40. This structure allows the hospital to bring its vision to market without burdening its balance sheet or diverting donor funds from clinical operations. 

JV Equity is not free money. 

PACE Financing: Green Capital, Long-Term Savings 

PACE (Property Assessed Clean Energy) financing is an underutilized gem in the world of real estate capital. Designed to encourage sustainability and energy efficiency, PACE funds improvements like solar panels, HVAC upgrades, and insulation. Repayment is made via property tax assessments over 20 or more years, making it a stable, low-impact form of long-term financing. 

Because the financing is tied to the property rather than the borrower, it transfers automatically upon sale and typically does not conflict with senior debt agreements. For developers trying to enhance the ESG profile of a property or meet new environmental codes, PACE delivers capital without draining equity reserves. 

Example: A charter school operating in an aging facility needs to replace its inefficient HVAC system and upgrade the roof to improve energy performance and reduce utility costs. Traditional funding options are limited, and capital reserves are prioritized for academic programs. Through a local PACE program, the school accesses $850,000 in financing, which covers the full cost of both upgrades. The repayment is structured over 25 years and added to the school’s property tax bill. Because this repayment structure is off-balance sheet and does not trigger debt covenants, it frees up capital and simplifies the approval process. The school enjoys immediate cost savings, improved learning environments, and a stronger case for sustainability to stakeholders and donors. 

PACE funds capital improvements.  

Conclusion

Mortgage debt is a starting point, not the finish line. A resilient capital stack demands strategic integration of every available lever—mezzanine debt, preferred equity, tax credits, joint ventures, and PACE financing—woven into a structure that balances risk and opportunity.

At Cap Ex, we translate that complexity into clarity. Every building has a budget, and every budget exposes gaps. Our role is to help owners close those gaps with creativity and discipline—aligning each capital source to the project’s risk profile, return objectives, and long-term mission.

The truth is that most owners and developers underestimate how many viable capital options are on the table. They either default to the first source that presents itself or rely too heavily on mortgage debt alone, leaving projects underfunded or overly exposed. That approach may work in a rising market, but it rarely survives downturns, refinancing shocks, or sudden cost escalations. Resilience is built by anticipating those realities and structuring accordingly.

A complete capital strategy does more than patch shortfalls—it unlocks opportunities. Properly layered funding can accelerate project timelines, attract stronger partners, and even expand the scope of what a building can deliver, from sustainability upgrades to higher community impact. This is where experienced guidance matters. Knowing how to sequence funding, negotiate terms, and position a project to lenders and equity partners can be the difference between a building that limps along and one that thrives.

Cap Ex exists to deliver that guidance. We work at the intersection of capital planning, asset management, and long-term strategy. Our clients don’t just “find money” to plug holes; they gain a capital roadmap that adapts as markets shift, investors evolve, and properties mature. If the goal is to build projects—and portfolios—that endure, then the capital stack must be treated as a dynamic tool, not a one-time transaction. That is the discipline we bring, and it’s why the strongest investors and developers see capital strategy not as an afterthought, but as a core competency.

Key Takeaways:

  • Mortgage debt is just the foundation. The most resilient capital stacks combine traditional loans with complementary layers such as mezzanine debt, preferred equity, tax credits, joint ventures, and PACE financing.

  • Mezzanine debt preserves control. By bridging gaps between senior loans and equity, mezzanine financing allows developers to move projects forward without surrendering ownership too early or too cheaply.

  • Preferred equity tops off the stack. It delivers fixed returns for investors while protecting the sponsor’s upside and maintaining decision-making control.

  • Tax credits and PACE financing unlock hidden value. Incentives for historic preservation, community investment, and sustainability improvements can inject real dollars into projects and reduce reliance on conventional debt.

  • Partnerships drive scale and resilience. Joint venture equity aligns capital partners and developers, creating shared risk and shared reward while accelerating project delivery.

References:

Berman, A. R. (2005). Risks and realities of mezzanine loans. New York Law School. https://digitalcommons.nyls.edu/fac_articles_chapters/437/ 

Consumer Financial Protection Bureau. (2022). Property Assessed Clean Energy (PACE) financing and consumer financial outcomes. https://www.consumerfinance.gov/data-research/research-reports/property-assessed-clean-energy-financing-and-consumer-financial-outcomes/ 

Deason, J. P., Carrozzo, K. L., & Fuller, M. C. (2020). Commercial Property Assessed Clean Energy (C-PACE) financing and the special assessment process (No. LBNL-2001310). U.S. Department of Energy, Lawrence Berkeley National Laboratory. https://www.energy.gov/sites/prod/files/2020/02/f71/CPACE-Special-Assessmentv3.pdf 

U.S. Environmental Protection Agency. (n.d.). Commercial Property Assessed Clean Energy (PACE). https://www.epa.gov/statelocalenergy/commercial-property-assessed-clean-energy 

Watkins, D. E. (n.d.). Commercial real estate mezzanine finance: Market opportunities. NYU Stern School of Business. https://pages.stern.nyu.edu/~igiddy/articles/CRE_mezzanine.html 

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