When a commercial property runs into trouble, including missed loan payments, rising vacancies, or a looming maturity with no clear refinance option, distressed capital steps in. These are the solutions that bring new funding, structure, or ownership to get a deal back on track.
Where Distressed Capital Comes In
Distressed capital can come from a range of players, each entering the deal at different points with different strategies:
Debt buyers
These investors purchase loans that are not performing well. Usually, they are buying the note at a discount from a bank, private lender, or loan servicer. From there, they can either restructure the loan with the borrower or begin the foreclosure process.Equity investors
These are the ones stepping in to acquire ownership of the property itself. Sometimes that happens through a foreclosure or auction. Other times it is a strategic play, buying the debt with the goal of eventually owning the real estate.Rescue capital providers
When a deal still has potential but needs capital to survive, this group steps in. They provide funds in the form of preferred equity or mezzanine debt. These investors usually structure their position carefully, so if the situation does not improve, they are first in line to take control or recover value.
Each approach has its own risks and rewards, but the common thread is speed and a deep understanding of complex deals.
How It Works
Here is a simplified breakdown of how distressed investing typically plays out.
Finding the Deal
Most of these opportunities do not show up on traditional listing platforms. Distressed investors rely on relationships, brokers, bankers, servicers, attorneys, and even property owners themselves.
They look for warning signs: missed mortgage payments, covenant breaches, struggling tenants, or capital shortfalls. Basically, anything that signals a deal is heading in the wrong direction.
Making the Case
Distressed underwriting is less about “what is the current rent roll?” and more about “what is this deal really worth, and how can we fix it?”
Investors dig into:- The asset’s current and potential value
- The capital stack, including who is owed what, and in what order
- Legal or title issues
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The surrounding market and competitive landscape
It is not just about evaluating a building. It is about figuring out how to create value in a broken situation.
Structuring the Approach
Once they have done their homework, investors figure out how to get involved:
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Buy the loan
If the lender wants off the deal, an investor might purchase the loan at a discount. From there, they either work it out with the borrower or pursue foreclosure to take ownership. -
Inject new capital
This often happens when the owner still has a viable plan but not enough runway. Investors step in with preferred equity or mezzanine debt and usually negotiate for protective rights or control triggers. -
Buy the asset outright
Sometimes the best route is to purchase the property through a foreclosure auction, recap, or distressed sale. These deals usually come with pricing that reflects the risk and complexity involved.
Fixing the Problem
After the investment is made, the hard work begins. That might mean:
- Reworking leases or signing new tenants
- Investing in improvements
- Cleaning up legal or title issues
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Managing expenses and boosting cash flow
In short, they roll up their sleeves to stabilize the asset and improve its value.
Exiting the Deal
Most distressed investors are not looking to hold long term. Once the property is stabilized, they typically:
- Sell the real estate
- Refinance to pull out their capital
- Or, if they bought the loan, sell the now-performing note
Why It Matters
If you are an owner or sponsor navigating distress, understanding how capital flows into these deals can make all the difference. Not all capital is the same. Some want control. Others just want a piece of the upside. And some may offer short-term solutions that come with long-term trade-offs.
Having the right advisor at the table can make a huge difference, whether you are looking to restructure your debt, bring in fresh capital, or evaluate your options before a loan matures.
At i95 Capital, we have worked across the capital stack and know what it takes to navigate complex situations and understand how to structure the right solution when capital and timing matter most. If you are in a tight spot or just exploring what is next, we are here to help.
