Alternative Lending and Subordinated Debt

finbird advises on structuring alternative lending and subordinated capital solutions for commercial real estate and corporate clients.

Alternative Lending and Subordinated Debt

We structure financing solutions with alternative lenders and subordinated capital where traditional banks and senior lenders cannot or do not want to cover the full funding need. Alternative lending and junior facilities close financing gaps, increase flexibility in the capital structure and create additional room for acquisitions, developments, growth or refinancing. Use cases range from commercial real estate portfolios and development projects to asset-heavy companies with substantial fixed assets. The focus lies on resilient cash flows, robust collateral, a credible equity contribution and a clearly defined exit path.

Background on Alternative Lenders

Alternative lenders have become an established pillar alongside banks. This group includes platform-based providers, specialised funds, insurers and family offices that provide debt capital to real estate sponsors and mid-market companies.

These capital providers work with their own underwriting processes and return targets, but are often willing to support situations that sit outside the traditional bank grid. This can include non-standard asset structures, higher financing ratios within a responsible corridor or projects with elevated capex requirements. Speed in decision-making and a well-prepared documentation package are key success factors.

What Is Alternative Lending

Alternative lending describes loan financings that do not stem from a traditional bank balance sheet but are provided by alternative capital providers. Investors may be private or institutional and deploy their capital via platforms or dedicated vehicles into individual loans or loan portfolios.

In the real estate space, many of these providers focus on secured loans for commercial assets, residential portfolios, development projects and bridge financings. Facilities are usually secured by a combination of mortgage and supplementary security and are clearly documented in terms of interest, tenor, repayment and reporting. Fixed interest rates, multi-year maturities and repayment profiles ranging from bullet structures to partially amortising schedules are common.

Subordinated Capital in Practice

Subordinated capital closes the gap between senior financing and equity. It is contractually subordinated to the first-ranking facility and bears higher loss risk in an enforcement scenario. In return, the provider receives a higher coupon or return-like components.

In practice, subordinated capital is often structured so that the bank loan remains unchanged in first rank, while an additional lender assumes an economically junior position. Subordination is clearly defined in the documentation without necessarily requiring complex intercreditor agreements. Interest and repayment are aligned with the senior structure and the project’s cash flows so that debt service and exit strategy form a coherent picture.

In particular when working with regional banks, savings banks or cooperative banks, subordinated capital can help to realise the overall funding requirement without pushing the senior lender beyond its internal lending limits.

Structuring Focus of Alternative Lenders

Alternative lenders look at many of the same topics as banks, but assess them with their own emphasis. They pay close attention to the track record of the principals involved, a clear project story, solid financial metrics and a security package that fits the risk profile.

Rather than applying purely formal criteria, the key question is whether the projected cash flows and collateral are sufficient to support the risk taken. This applies both to real estate transactions and to mid-market companies with substantial fixed assets. Typical transactions operate in the volume range of larger mid-market and project financings, with multi-year tenors and pricing clearly above traditional bank levels. Specific corridors for size, tenor, covenants and collateral are defined case by case and structured as part of the advisory process.

Distinction From Senior Debt and Private Debt

Alternative lending and subordinated capital differ from classic senior debt and private debt mainly in terms of ranking, risk and pricing. Senior debt is usually first-ranking, conservative in terms of leverage and the most cost-efficient layer of debt capital. Private debt typically operates on a senior or senior-like basis and often remains first-ranking, while providing more flexibility than standardised bank products.

Alternative lending and subordinated capital deliberately accept additional risk. This may be reflected in the ranking of the security package, in the share of the capital structure financed or in the design of covenants. In return, these financings command a higher coupon, combined with a strong focus on transparent planning, ongoing information and clearly defined exit scenarios. In an integrated capital structure, senior debt forms the foundation, private debt and whole loans broaden the first-ranking spectrum, and alternative lending and subordinated capital are used to close targeted funding gaps.

Reference Cases

An investor acquired a predominantly residential mixed-use asset in Berlin financed in first rank by a regional bank. Due to internal lending limits, the bank could only cover part of the overall funding requirement. A subordinated loan from an alternative lender was structured to supplement the investor’s equity contribution without pushing the senior lender outside its risk corridor. Contractual subordination, an aligned security concept and a clear refinancing path after stabilisation of rental income formed the basis of the overall structure.

A developer planned a mixed-use quarter with residential and commercial components in North Rhine-Westphalia. The relationship bank provided a traditional development facility up to a defined loan-to-cost level. To fund land acquisition, pre-development and additional reserves, a complementary platform-based financing was arranged, structured on a bullet basis with a higher coupon. Construction milestones, regular reporting and a clearly defined repayment from sales proceeds and subsequent refinancing of the residual portfolio created transparency for all parties.

A mid-market company in Baden-Württemberg with its own operating properties and extensive machinery required additional capital for growth and to refinance short-dated credit lines. Relationship banks provided a first-ranking secured senior facility but did not want to increase leverage further. A subordinated loan from an alternative lender was agreed in addition, secured on a junior basis and governed by covenants aligned with the senior structure. The additional capital enabled the investment programme while keeping bank lines within the agreed framework.

FAQs

What Is Meant by Alternative Lending in Real Estate?

In real estate, alternative lending refers to loan financings that are not provided by traditional banks but by alternative capital providers such as platforms, specialised funds or insurers. These are typically secured loans for commercial assets, residential portfolios or development schemes that are used alongside or in place of bank financing.

How Does Subordinated Capital Differ From a Traditional Bank Loan?

Subordinated capital ranks behind the bank’s senior facility and is only repaid after the senior debt has been fully serviced in an enforcement scenario. It therefore carries higher risk and is priced with a higher coupon. At the same time, it allows financing gaps to be closed without forcing the senior lender to stretch its internal lending limits.

Which Types of Projects Are Suitable for Alternative Lending and Subordinated Capital?

Suitable candidates are projects and companies with clear cash flows and robust collateral where the overall funding need exceeds what banks are prepared to provide. Typical examples include commercial real estate financings, developments, bridge financings, portfolio refinancings and asset-heavy business models with stable earnings.

How Do Interest Rates Compare With Traditional Bank Financing?

Interest rates in alternative lending and subordinated capital are generally higher than traditional bank terms because the capital provider takes on more risk. The exact level depends on ranking, security, tenor, project quality and overall structure and is negotiated individually.

What Role Does the Equity Contribution Play?

A meaningful equity contribution from the shareholders remains an important element in structures with alternative lenders. It demonstrates alignment of interests, improves the resilience of the capital structure and has a positive impact on appetite from both banks and alternative capital providers.

Can Banks and Alternative Lenders Work Together in One Financing?

In many transactions, bank financing and alternative lenders are deliberately combined. The bank provides a first-ranking senior facility, while an alternative lender takes on a complementary tranche that is structurally junior. Clear ranking, coordinated security and a transparent covenant framework are crucial so that all parties understand their role in the overall structure.

What Tenors Are Typical for Subordinated Capital and Alternative Loans?

Tenors are usually multi-year and aligned with project logic, holding period and planned exit. Transition and bridge financings tend to be shorter, while portfolio refinancings and corporate financings can support longer maturities. The key is that maturity and repayment profile fit the intended exit or refinancing strategy.

How Do Alternative Lenders Assess Risk?

Alternative lenders require a transparent picture of the project or company, including business plan, cash flows and collateral. The risk analysis is similar in many respects to bank underwriting but is more strongly geared towards return profiles and scenario analysis. A credible plan for exit, refinancing or repayment is therefore a central element in the risk assessment.

What Role Does Reporting Play During the Life of the Facility?

Regular reporting is a key component of structures involving alternative lenders. During the life of the facility, agreed metrics, project progress, leasing, sales proceeds or corporate KPIs are reported at defined intervals. This allows both capital providers and borrowers to keep track of the financing and to make adjustments early if required.

What Documentation Is Typically Required for an Enquiry to Alternative Lenders?

Typically, lenders expect a concise project or company overview, detailed financial projections, information on existing financings and collateral and market or location analyses. Depending on the case, valuation reports and technical documentation may be added. The better this information is prepared and structured, the quicker alternative lenders can provide a robust initial view.

Financing Process

Our process for alternative lending and subordinated capital starts with a structured analysis of the asset or company, cash flows, the existing bank structure and the desired funding need. On this basis, we define which share can sensibly be covered by senior financing and which share should be provided by alternative lenders or subordinated capital. In a next step, an investor-ready financing request is prepared, clearly describing funding need, security concept, business plan, exit strategy and reporting framework. Suitable alternative lenders are identified and approached on this basis. Structure, covenants and ranking are carefully aligned with the existing bank financing. During negotiations, terms, security and contractual subordination provisions are finalised before the transaction is translated into legal documentation and implemented. The objective is an overall structure in which banks, alternative lenders and borrowers operate within clear, reliable parameters and in which financing, cash flows and project logic remain aligned over the long term.