We work with sponsors who approach capital decisions mechanically. "Debt is cheaper than equity, so maximize debt." That's the wrong framework.

The right question isn't "What's cheaper?" The right question is "What structure makes this deal work and still delivers returns?"

Understanding the trade off

Debt is indeed cheaper. A 7% fixed-rate mortgage costs less than 10-12% preferred equity. But debt comes with obligations you can't escape:

• Debt service requirements, regardless of cash flow

• Loan covenants and compliance

• Refinancing risk when the loan matures

• Lender control over major decisions

• Default consequences if things go wrong

Equity is more expensive but more forgiving:

• No mandatory distribution requirement

• Flexible capital calls and structures

• Co-investor relationship (not just creditor)

• Shared risk and upside

• Strategic partnership beyond pure capital

The real question

Here's what we see happen with sponsors who maximize debt: they create unforgiving deals.

Let's say you underwrite a development at 90% LTV with 1.25x DSCR. That works if everything goes perfectly. But development delays happen. Cost overruns happen. Market timing shifts happen.

When things go wrong—and they will—you don't have cushion. You have lender pressure. You have covenant violations. You have stress.

Sponsors who use more equity and less debt have flexibility. Development costs rise 10%? You absorb it because equity doesn't demand payment. Lease-up takes 3 months longer? You have breathing room because equity investors have patience.

Real example

We recently closed a $75M mixed-use development. The sponsor's first approach: $60M senior debt (80% LTV), $15M equity. That looked cheap on paper but left no room for construction delays or cost overruns.

Our recommendation: $45M senior debt, $15M mezzanine, $15M preferred equity. More expensive structurally, but the deal was safer. Development costs overran by $3M. They absorbed it. Construction extended 8 weeks. They had capital to cover. The deal succeeded because the structure was resilient.