Performance-based financing tools provide flexibility for an evolving CRE market.
The commercial real estate market is confronting a perfect storm of increased supply, tariff-related uncertainty and refinancing pressure. According to CommercialCafe’s November 2025 National Industrial Report, industrial vacancy rates stood at 9.7% — up 220 basis points year over year — as recent construction completions continue flooding the market. Multifamily faces similar headwinds, with Apartment List data showing the national vacancy rate hitting 7.3% to close out 2025, accompanied by negative year-over-year rent growth.
Against this backdrop, nearly $957 billion in commercial real estate mortgages were slated to mature in 2025, almost triple the 20-year historical average. Trepp reported that delinquency rates for commercial mortgage-backed securities reached 7.29% in August, forcing borrowers and lenders to confront refinancing challenges amid elevated interest rates and tighter credit conditions.
In this environment, financing is no longer a binary exercise of “approved” or “denied.” Lenders and developers are increasingly exploring structures that provide flexibility without overexposing either party. Among the most effective tools are earn-outs and tiered recourse arrangements, which align capital deployment with real-world project performance. These structures recognize that projects evolve over time and that both market conditions and tenant needs can change, making adaptable financing solutions essential.
Flexibility for a Shifting Market
Traditional financing structures often fail to accommodate these uncertainties, leaving developers and lenders exposed to potentially overleverage a project.
Earn-outs allow developers to secure an initial portion of funding while tying subsequent disbursements to clearly defined performance milestones. In other words, earn-outs focus on the timing and amount of capital released rather than on the developer’s personal liability.
In practice, this might mean a multifamily project receives baseline capital for construction, with additional funding released as economic performance thresholds are met. A warehouse with high clear height specifications may only receive funding for the box up-front, with the “good news” money tied to securing credit tenants, achieving expected rents or signing longer-term leases. In this way, industrial developers can also benefit from performance-linked funding.
This approach ensures that lenders are not fully exposed if market conditions shift, while borrowers retain the flexibility to adapt to
tenant demands. By linking funding to performance, developers have certainty that future liquidity is available for achieving the business plan, while lenders retain confidence that capital is deployed efficiently.
Tiered Recourse: Aligning Incentives in Real Time
In contrast, tiered recourse structures focus on the developer’s liability rather than the timing of funding. Unlike traditional loans, which are often strictly recourse or nonrecourse from day one, tiered recourse allows liability to adjust based on project performance. By starting with partial or full recourse and reducing it as milestones are achieved, lenders incentivize disciplined execution while developers gain confidence that their personal risk will decline as the project stabilizes. This flexibility is especially valuable in today’s uncertain markets, where construction delays, cost uncertainty, evolving tenant needs and shifting demand can affect cash flow and project viability.
For example, a self-storage development might start with a recourse arrangement tied to the developer’s balance sheet, but as leasing ramps up and the property proves operational, recourse could step down, eventually converting the loan to nonrecourse. This structure encourages developers to effectively manage the risk parameters of the project with the incentive of lowering personal liability with success. Lenders benefit by having additional security during the riskiest portion of the project.
Balancing Creativity With Rigor
The rise in performance-based financing doesn’t signal a loosening of underwriting standards. On the contrary, flexible structures require even greater rigor in analyzing pro formas, market trends and contingency plans. Developers should expect lenders to scrutinize assumptions about lease-up rates, tenant credit and potential market shifts. This heightened analysis encourages developers to plan strategically and consider multiple scenarios, demonstrating preparedness and strengthening lender confidence.
Performance-based structures also demand clear metrics and reporting. Developers must track progress against milestones and communicate this data transparently to lenders. This transparency reduces risk for the lender while also giving developers actionable insights to adjust course if market conditions shift.
In essence, performance-based financing rewards creativity and innovation, but only when paired with disciplined planning and rigorous analysis. Balance sheet lenders have the flexibility to tailor deals to meet the market and allow developers to proceed knowing the rules and expectations established at the outset. By aligning capital with project performance, developers embed resilience into the capital stack, navigate market shifts more effectively, mitigate risk and seize emerging opportunities — the difference between waiting on the sidelines and bringing a successful project to market.
Steven Wyent is the manager of commercial underwriting at Alliant Credit Union.
