Private Credit Lending: How $10M+ Sponsors Use Direct Lending to Fill Capital Stack Gaps Without Giving Up Equity

Private credit is a precision tool, not a default. According to CREFC, real estate debt accounted for 19% of all private debt fundraising in the first half of 2025 - the highest share in five years. That availability is real, but availability is not the same as fit. Sponsors who reach for direct lending when the bank falls short, when mezzanine is too expensive, or when preferred equity feels like too much governance to give up are using the instrument as a catch-all rather than a deliberate structural choice. The real question is which instrument fills the gap without creating unnecessary dilution, intercreditor drag, or governance concessions that serve no structural purpose.

Real estate private credit has grown fast. According to CREFC, real estate debt accounted for 19% of all private debt fundraising in the first half of 2025, the highest share in five years. More capital is available than at any point in recent memory. But availability is not the same as fit.

Most sponsors treat private credit as a catch-all for gap capital. They reach for it when the bank falls short, when mezzanine is too expensive, or when preferred equity feels like too much governance to give up. That framing misses the point. Private credit and direct lending are a specific instrument with distinct economics, underwriting criteria, and documentation requirements.

The real question is not whether to use alternative capital. It is which instrument fills the gap without creating unnecessary dilution, intercreditor drag, or governance concessions you did not need to make.

This article focuses on three things:

• When private credit is the right decision at the margin versus mezzanine or preferred equity
• What direct lending actually costs in 2025-2026 conditions
• What the data room must include before a direct lender will issue serious paper

If you are still building the foundational layer of your stack, start with the capital stack structuring framework for $10M-$50M deals. This article picks up where that one ends.

When Private Credit Makes Sense and When It Does Not

Private credit is not the right answer for every gap. It is the right answer for a specific set of sponsor situations. Getting that decision wrong costs time, money, and sometimes the deal.

When Private Credit Is the Right Tool

1. Senior proceeds are capped by debt-service constraints, not asset quality. PGIM Real Estate's 2025 private credit spotlight notes that senior lenders remain bound by debt-service coverage requirements even as asset fundamentals have improved. When the shortfall between senior proceeds and total project cost is a structural lending constraint rather than a sponsor credibility problem, private credit fills that gap cleanly without requiring equity dilution.

2. Speed and execution certainty matter more than blended cost optimization. Direct lenders can move from term sheet to close faster than a syndicated structure or a multi-party preferred equity negotiation. When a sponsor is under time pressure on a site control deadline, a recapitalization, or a competitive acquisition, the execution premium of private credit is real.

3. The sponsor wants debt treatment without intercreditor friction. A unitranche or whole-loan structure from a single direct lender eliminates the intercreditor negotiation entirely. As Latham & Watkins notes in the Chambers Private Credit 2026 guide, many larger private credit transactions are now structured as unitranche deals with the waterfall mechanics embedded directly in the credit agreement, removing the need for a separate intercreditor arrangement.

When Private Credit Is the Wrong Tool

• The asset is too speculative for debt-style underwriting. Direct lenders still underwrite to repayment, not equity upside.
• The business plan requires true risk capital with no current or near-term debt service capacity.
• The senior lender has already prohibited any subordinate debt instrument.
• The gap is small enough that preferred equity is cheaper on a total-economics basis.

For a broader view of how layer selection connects to execution risk, see the IRC guide on capital stack layers that minimize risk for developers.

What Private Credit Costs in 2025-2026

Headline rate is the least useful number when pricing private credit. Real cost includes origination fees, exit fees, rate floors, PIK toggles, extension economics, and the governance or consent terms that come with some structures. The table below reflects current market conditions based on data from PwC's real estate deals outlook, Calamos/Aksia's 2025 private credit outlook, and CREFC market reporting.

Key insight: Private credit maintained roughly a 200 basis point premium over public credit markets after post-COVID normalization, according to the Calamos/Aksia database. That premium reflects illiquidity and structure, not necessarily higher risk than a well-underwritten deal warrants.

What Shapes Real Cost Beyond the Rate

Three variables move the real cost of private credit more than the stated coupon:

• Fees and floors. A 1.5% origination fee on a 12-month loan adds roughly 150 bps to annualized cost. A SOFR floor at 4.5% matters when forward rates move.
• PIK optionality. Some direct lenders offer PIK elections during construction or lease-up. This reduces cash-pay burden but compounds the principal balance. Model the exit distribution, not just the current coupon.
• Extension economics. Many direct lending term sheets include extension fees of 25-50 bps per option period. On a two-year loan with two six-month extensions, that is real cost the base-case model often ignores.

Mezzanine typically carries the highest stated return because it accepts subordinate risk with tighter enforcement rights. Preferred equity can look cheaper on headline current pay but often carries higher total economics once accrued return, participation, governance rights, and consent fees are included.

Private Credit vs. Mezzanine vs. Preferred Equity: The Dimensions That Actually Matter

The comparison most sponsors run is coupon versus coupon. That misses the variables that actually determine whether a deal closes cleanly, survives a stress scenario, and protects GP economics through exit. Sponsors who want to anchor the dilution question specifically should also read the IRC guide on how sponsors raising $10M+ decide which capital structure protects the most equity at exit.

The table below compares all three instruments across eight dimensions that matter at the decision margin. For a deeper look at how mezzanine and preferred equity compare on the senior lender approval question specifically, see the IRC article on choosing between senior debt, mezzanine, and preferred equity.

Why Intercreditor Friction Is the Deciding Factor

Intercreditor friction is the variable sponsors most consistently underestimate. Lowenstein Sandler's analysis of intercreditor agreements identifies enforcement rights, standstill periods, and payment blockages as the primary friction points between senior and junior creditors. In a classic mezzanine structure, the senior lender and mezz lender each have rights that must be negotiated and documented before closing. That process adds weeks and legal cost.

A direct lender offering a unitranche facility eliminates that friction entirely. The waterfall mechanics are embedded in the credit agreement. One lender. One set of documents. One closing process.

That structural advantage is not captured in a coupon comparison.

What Direct Lenders Underwrite Differently

Direct lenders underwrite to repayment, not upside. That sounds obvious, but it changes what they scrutinize compared to senior lenders, mezz funds, and preferred equity investors.

Compared to Senior Lenders

Senior lenders focus on debt-service coverage, LTV, and regulatory capital treatment. Direct lenders accept more structural complexity but demand sharper visibility into:

• Business-plan credibility. Lease-up timelines, pre-leasing thresholds, construction draw controls, and stabilization milestones must be supported by market data, not just sponsor assumptions.
• Liquidity support. Direct lenders want to see interest reserves, completion guaranties, and sources of capital for cost overruns before they issue a term sheet.
• Amendment and extension scenarios. Unlike a bank that extends on a relationship basis, a direct lender underwrites the extension path at origination. If the deal runs six months long, what does the capital structure look like?

Compared to Mezzanine Funds

Mezz funds focus heavily on enforcement rights and cure period mechanics. Direct lenders operating in a whole-loan or unitranche structure care less about enforcement sequencing (because they control the whole loan) and more about:

• Covenant design. What triggers a default? What gives the lender amendment leverage before a default occurs?
• Documentation leverage. Latham & Watkins' 2026 private credit guide notes that direct lenders are increasingly proactive about engaging with borrowers on potential problems before they materialize, including through pre-negotiated amendment frameworks and PIK flexibility provisions.

Compared to Preferred Equity Investors

Preferred equity investors underwrite governance and control rights as part of their return. Direct lenders underwrite collateral and cash flow. That means:

• Less focus on sponsor promote structure and waterfall economics
• More focus on collateral path, refinance or sale takeout viability, and downside recovery
• Greater emphasis on guaranty package, completion risk, and recourse carve-outs

The practical implication: sponsors who prepare a debt-specific underwriting package rather than a repurposed equity pitch deck move faster with direct lenders and generate better terms.

What the Data Room Must Include Before a Private Credit Raise

A direct lender's data room is not a pitch deck with attachments. It is a credit underwriting package. Sponsors who send a fundraising data room to a direct lender create friction, slow the process, and often get passed over for sponsors who understand what the lender is actually trying to answer.

The checklist below is organized by the four files a direct lender needs to move from screening to term sheet. This structure is distinct from the general data room framework in IRC's data room organization guide for real estate fund managers and from the preferred equity data room requirements covered separately in the IRC cluster. For a speed-focused build framework, see the IRC guide on how to build a data room that closes institutional investors in 30 days instead of 90.

The most common data room mistake: over-investing in the executive summary and investor narrative while leaving the debt-specific files incomplete. A direct lender does not need to be sold on the market opportunity. They need to underwrite the downside.

For context on how the capital stack risk reduction framework connects to lender preparation, see the IRC guide on five capital stack risk reduction strategies for $10M+ raises.

Use Private Credit as a Precision Tool, Not a Default

Private credit is not the answer when the bank says no. It is the answer when a sponsor needs gap capital without equity dilution, intercreditor friction, or governance concessions that serve no structural purpose.

Three rules to carry forward:

• Choose based on stress-case behavior, not headline coupon. The instrument that looks cheapest on paper often carries the most friction in a workout.
• Prepare a debt-specific data room. A direct lender underwrites to repayment. Your materials should reflect that.
• Get the layer decision right before outreach. Rebuilding the structure after term sheets are in motion costs time, legal fees, and sometimes the deal.

Ready to evaluate private credit for a live deal? IRC Partners works with seasoned developers raising $10M+ to structure the capital stack before going to market. Book a capital stack review with IRC to get the layer decision right the first time.

Frequently Asked Questions‍

What is the minimum deal size for a private credit or direct lending raise in real estate?

Most institutional direct lenders focus on transactions of $10M or more in total loan exposure, with a practical sweet spot of $15M-$75M for middle-market CRE. Below $10M, the lender's underwriting cost relative to loan size makes execution inefficient. Sponsors with smaller gaps often find that preferred equity or a regional bank mezz product is more accessible than a dedicated private credit fund.

How long does it take a direct lender to issue a term sheet after receiving a data room?

A well-prepared, debt-specific data room typically generates a preliminary term sheet within 7-14 business days from a direct lender who has already confirmed deal-type fit. Incomplete packages, missing stress scenarios, or unclear collateral documentation can push that timeline to 30-45 days or stall the process entirely. Speed is one of private credit's primary advantages, but only when the sponsor's materials are ready to underwrite on day one.

Do direct lenders require personal recourse on real estate private credit loans?

Most institutional direct lenders structure loans as non-recourse with standard carve-outs, commonly called "bad boy" guaranties, covering fraud, misrepresentation, environmental liability, and voluntary bankruptcy. Completion guaranties are common on ground-up construction. Full recourse is rare at the institutional level but may appear in smaller or higher-risk transactions where the lender has limited collateral coverage.

Can a sponsor use private credit alongside a senior loan from an agency lender?

It depends on the agency program. Fannie Mae and Freddie Mac typically prohibit subordinate debt instruments, which rules out most direct lending structures. Some agency programs permit preferred equity in the equity layer, but that is a different instrument. Sponsors pursuing agency senior debt should confirm subordinate capital restrictions in writing before approaching any private credit provider. Misalignment at this stage can unwind a deal after term sheets are signed.

What covenants should a sponsor expect in a private credit term sheet for real estate?

Direct lending term sheets for real estate typically include debt yield covenants tested at each draw or quarterly, minimum liquidity covenants tied to interest reserve coverage, construction milestone covenants with cure periods of 30-60 days, and leasing progress benchmarks for lease-up assets. Covenant-lite structures exist in larger transactions but are less common in the $10M-$75M middle market. Sponsors should negotiate cure periods before signing, not after a technical default.

How does PIK interest work in a direct lending structure, and when should a sponsor request it?

PIK, or payment-in-kind, interest allows the borrower to add unpaid interest to the principal balance rather than paying it in cash. It is most useful during construction or early lease-up when cash flow is insufficient to cover debt service. Not all direct lenders offer PIK optionality, and those that do typically charge a spread premium of 50-150 bps for the PIK election. Sponsors should model the compounding effect on exit distributions before electing PIK, as the higher principal balance reduces net proceeds at sale or refinance.

What is the difference between a whole loan and a unitranche in private credit real estate lending?

A whole loan is a single first-lien mortgage loan covering the full debt amount, typically originated by one lender who holds the entire position. A unitranche is a blended first-lien and subordinate structure packaged as a single loan by one lender, with the internal economics split between first-out and last-out positions behind the scenes. Both eliminate intercreditor friction for the borrower. The practical difference is that whole loans are typically used for stabilized or near-stabilized assets, while unitranche structures are more common in construction and transitional lending where the lender is stretching on proceeds.

Continue reading this series:

• How to Structure a Capital Stack for a $10M-$50M Real Estate Deal
• Senior Debt vs. Mezzanine vs. Preferred Equity: Which Layer Do You Actually Need?
• 5 Capital Stack Risk Reduction Strategies for $10M+ Raises‍

Most founders don't lose the raise because of the pitch. They lose it because the structure was wrong before the first investor call. IRC Partners advises founders raising $5M to $250M of institutional capital. 7 strategic partners per quarter. Start here to schedule a call with our team.