Equity Tied Up? Unlocking Capital Without Selling Out

High-net-worth real estate investors often find themselves asset-rich but cash-constrained, with substantial equity tied up in properties that are performing well. This “trapped equity” refers to value built up in an asset that isn’t readily accessible as spendable capital (source: CBS News – Trapped Home Equity (2023)). For example, a long-term owner of a trophy commercial building might have seen the property’s value and net operating income climb for years, resulting in millions in equity on paper. Yet accessing that wealth without selling the asset can be challenging. Owners seek liquidity for many reasons—new investment opportunities, portfolio diversification, paying down other obligations, or estate planning—while wanting to retain ownership of their high-performing real estate.

Understanding Trapped Equity in Real Estate

Why not simply sell the property and cash out? For one, many owners are reluctant to “sell out” of trophy assets or prime locations that would be difficult to replace. They value the ongoing cash flow and long-term appreciation potential. There are also substantial tax incentives to hold onto real estate. Selling a highly appreciated property triggers capital gains taxes (and depreciation recapture), whereas if an owner holds the asset until death, their heirs receive a stepped-up basis (resetting the asset’s tax basis to market value) which can eliminate those capital gains taxes entirely. In other words, long-term holders often prefer to keep the property in the family to maximize generational wealth transfer. Additionally, many seasoned investors locked in ultra-low interest rate financing in years past and are now “locked in” by those favorable loans (source: CBS News – Locked-In Mortgage Rates (2023)) . If they were to sell and buy a new asset (or even refinance), they’d face today’s much higher interest rates, eroding cash flow. Indeed, between 2022 and 2023 the Federal Reserve raised benchmark rates to about 5.25%–5.50% (source: Federal Reserve – July 2023 Interest Rate Hike) – the highest level in over two decades – dramatically increasing the cost of debt financing. Many owners with debt from the low-rate era are choosing to hold rather than reset their financing at current rates. The result is a record amount of untapped equity sitting in stabilized properties.

Those most likely to face this “equity tied up” scenario are long-term owners with little or no debt on their real estate, developers who built and stabilized a project and now have a large gap between current value and loan balance, and legacy investors whose properties have appreciated significantly over time. These stakeholders want liquidity (cash out) for various strategic reasons but prefer not to lose control or full ownership of their real estate. Fortunately, there are several ways to unlock that equity without a full disposition. Below we explore a range of strategies – from debt refinancing to bringing in partners to creative exchange techniques – that allow owners to tap into built-up value while retaining their asset. Each approach comes with its own considerations in terms of cost of capital, control, risk, and complexity.

Primary Option: Cash-Out Refinancing

The most straightforward way to unlock equity is through a cash-out refinance on the property. In a cash-out refi, the owner takes a new mortgage loan larger than the remaining balance of any existing loan, and “cashes out” the difference in proceeds. Essentially, you are borrowing against the equity you’ve built up. For example, imagine a commercial property currently worth $10 million with an existing loan balance of $3 million. The owner could refinance with a new loan at, say, 60% loan-to-value (LTV) – that would be a $6 million mortgage. From that, $3 million would pay off the old loan, and the remaining $3 million (minus any transaction costs) would be disbursed to the owner as cash. This maneuver allows investors to extract previously illiquid equity without selling the property (source: CommLoan – What is a Commercial Cash-Out Refinance?)

Cash-out refinancing effectively monetizes a portion of your real estate’s value while you continue to own it. Importantly, the proceeds from a loan are not considered taxable income – you’re borrowing money, not realizing a gain. That means you can receive a substantial sum without an immediate tax bill, unlike a property sale which would trigger taxes on any gains. Many investors use cash-out refis to fund new acquisitions, property improvements, or to return capital to stakeholders, all while deferring taxes that a sale would incur. According to commercial lending experts, it’s common for lenders to require that owners retain around 20% equity in the property post-refinance (hence typical maximum LTVs are 75%–80%) (source: CommLoan – Minimum Equity Required for Refinance). In practice, you generally need at least 30%–40% equity in the asset to even qualify for a cash-out loan, and many lenders and loan programs cap the refinance at around 70%–75% LTV, leaving a prudent equity cushion in the deal.

Underwriting considerations: When pursuing a cash-out refi, be prepared for rigorous underwriting. Lenders will evaluate the property’s current appraised value, its recent financial performance, and the ability of its income to support the larger debt. Key metrics include the Debt Service Coverage Ratio (DSCR) – typically the net operating income (NOI) must cover the new debt payments by at least 1.20–1.30× (the exact minimum DSCR depends on the lender and property type) – as well as the loan-to-value threshold noted above. For example, if your property nets $500,000 in annual NOI, a lender might limit the new loan such that annual debt service is no more than around $400,000 (DSCR 1.25), which indirectly caps how much they’ll lend. Lenders also look at your trailing 12-month occupancy and income trends, tenant strength (for commercial assets), lease terms, and overall market conditions. Expect to provide up-to-date financial statements, rent rolls, and possibly third-party reports (appraisal, environmental, etc.) during the refi process.

Strategic timing: Is now a good time to refinance? That depends largely on the interest rate environment and your financing terms. In a low-rate environment, refinancing can lock in cheap capital and even reduce your monthly debt service while pulling out cash. In today’s higher-rate climate, however, a cash-out refinance might significantly increase your borrowing costs. For owners with an existing mortgage at, say, 3.5%, refinancing into a loan at 6.5% will noticeably shrink cash flow. Many owners who refinanced or bought properties in 2020–2021 at rock-bottom rates are finding that a cash-out refi today “simply doesn’t make sense” because current rates could double their interest expense (source: CBS News – Refi Doesn’t Make Sense in High Rate Era). It may be wiser to explore alternative methods (like mezzanine financing or partial equity sale) to tap equity while leaving an ultra-low-rate first mortgage in place. That said, if you have a pressing need for liquidity or a compelling opportunity to deploy capital, the cost of higher interest may be justified. Always weigh the effective cost of the new debt (after accounting for its interest rate, amortization, and fees) against the potential returns from the uses of the cash.

Beware of over-leveraging: Just because a lender is willing to lend, doesn’t mean you should take the maximum cash out. Maintaining prudent leverage is crucial, especially in uncertain market conditions. Higher debt means higher fixed payments and less cushion if something goes wrong. If property income declines or economic conditions worsen, an over-leveraged asset can quickly become distressed. Real estate experts note that aggressive cash-out financing can erode the margin of safety – if values dip, highly leveraged owners could end up underwater or in default more readily (source: NREI – Mezzanine Loan Risk Commentary). Moreover, high interest debt carries a compounding effect. At a 7%–8% interest rate, the total interest paid over the life of the loan will be very substantial. If you’re paying only interest (interest-only period) or if the loan balance isn’t being paid down much, interest on a large balance accrues year after year, reducing your equity growth. In short, be cautious about taking on debt that the property’s cash flow can barely support, or that might jeopardize your equity if market rents or values falter. It’s wise to stress-test your refinance – e.g. “What if interest rates rise further or occupancy drops 10%? Will I still cover my debt comfortably?” Use conservative assumptions to ensure the refinance enhances your financial position rather than putting it at risk.

On the upside, a well-timed refinance in a stable asset can be an elegant solution to unlock funds. You continue to own 100% of the property, participate in all future upside, and you’ve simply rebalanced your capital stack by substituting some equity for debt. There is no dilution of ownership or control. And unlike a sale, a refinance is typically faster and has lower transaction costs (no broker fees, lower closing costs than a full sale). As long as the new debt is used wisely and the property can comfortably service it, a cash-out refi lets you have your cake and eat it too – you keep the asset working for you, while freeing up idle equity into cash.

Secondary Debt: Mezzanine Loans & Preferred Equity

What if refinancing the first mortgage is not ideal – for instance, because the current mortgage has an exceptionally low rate or a hefty prepayment penalty? In such cases, owners often turn to the secondary debt layer of the capital stack, namely mezzanine financing or preferred equity. These tools allow you to borrow against your equity without disturbing the existing first loan.

Mezzanine loans are essentially junior loans that sit behind the senior mortgage in priority. Instead of being secured by the property directly (since most primary mortgages prohibit placing a second mortgage on the property), a mezzanine loan is typically secured by a pledge of the ownership interests in the property-owning entity. In the event of default, the mezzanine lender can foreclose on that ownership stake (essentially taking over the borrower’s equity in the property) rather than foreclosing on the real estate itself (source: NREI – Mezz Foreclosure Rights). Mezzanine debt usually carries a higher interest rate than the first mortgage – often substantially higher, reflecting its greater risk. Rates of **8%–12% (or more)** are common, depending on market conditions and the asset’s risk profile. These loans often do not require principal amortization during the term (interest-only payments), and they typically have shorter terms (say 2–5 years). A key advantage is that mezz financing can provide needed cash now while leaving your superior first loan intact. For example, if your property is worth $10M with a $5M first mortgage at 3% interest, you might add a $2M mezz loan at 10% interest. You’ve now pulled out $2M in cash, and you continue paying the cheap 3% on the senior $5M loan, plus 10% on the junior $2M. The blended cost of capital can often be favorable compared to refinancing the entire $7M at today’s higher first mortgage rates.

Preferred equity is a closely related tool, but structured as an equity investment rather than debt. In a preferred equity deal, the investor contributes cash to the property owner’s business in exchange for a special ownership class that has priority return rights. Preferred equity investors are not lenders; they become a partner in the ownership entity (usually a non-managing partner) with an agreement that they receive a fixed return (for example, an 8–12% annual preferred return) before the common equity (the original owner) takes any profits. While technically equity, preferred equity behaves a lot like mezzanine debt in that it’s a *capital infusion with a contractually preferential payout*. The pref equity holder’s rights are typically governed by the partnership agreement rather than a mortgage. Importantly, preferred equity is subordinate to all debt (the first mortgage and any mezzanine loans must be paid first) but ranks above the common equity in both cash flow distributions and in claims if the asset is sold. In practice, this means if you bring in a preferred equity investor, they will get their preferred return paid out (from property cash flow or sale proceeds) before you as the common equity receive any return beyond your base salary or asset management fees. Once their capital and any accrued return is paid back at the end of the deal, any remaining profits would go to you as the common owner. Preferred equity can be structured as *non-participating* (the pref investor gets only their fixed return, no share of upside beyond that) or *participating* (they get their pref return **plus** some small share in upside beyond a certain hurdle). Most owner-operators prefer non-participating pref equity so that once the pref is paid, the remaining upside stays with them.

From a cost perspective, mezzanine debt and preferred equity often overlap. It’s not unusual to see preferred equity deals targeting similar returns as mezz debt – high single digits to low teens. In fact, one industry saying is that mezzanine financing is “expensive debt but cheaper than equity” (source: Investopedia – Mezzanine Financing Overview). It fills the gap between cheap senior loans and costly common equity. The decision of which to use can depend on legal or practical constraints: if the senior lender will not allow any form of subordinate debt, sometimes preferred equity can be used instead because, technically, it’s not recorded as a lien (though many senior loan agreements also require lender consent before taking on preferred equity due to its debt-like nature). Mezzanine loans, being debt, typically have foreclosure rights and sometimes a quicker remedy in default; preferred equity investors, being partners, don’t foreclose on the property but often negotiate rights to take over management or force a sale if they aren’t paid (so-called “remedies” in the JV agreement). From an owner’s standpoint, both are tools to tap additional capital while keeping your original loan untouched.

When to consider mezzanine or pref equity: These are particularly useful if your existing first mortgage is very favorable (e.g. a low interest rate, or a CMBS/insurance loan with a huge defeasance prepayment cost) such that refinancing it would be detrimental. Instead, you layer on a mezzanine loan or pref equity behind it to extract equity. It’s also common in development or value-add projects: for instance, after building a project, instead of refinancing immediately (perhaps the project isn’t fully stabilized yet to get the best perm loan), the developer might use a short-term mezz loan or pref equity investment to cash out some funds or complete the lease-up, and later, once the project is fully stabilized, do a complete refinancing. Additionally, if senior lenders are only willing to lend up to, say, 60% LTV on a project but the sponsor wants to finance 70-80%, a mezz or pref can supply that extra 10-20% leverage – essentially allowing higher overall leverage by splitting it between a senior loan and a junior capital piece. Many commercial real estate acquisitions are financed with a “stack” of capital: for example, 55% senior loan from a bank, 15% mezz loan from a debt fund, and 30% equity from the sponsor. That mezz slice gives the sponsor more leverage than banks alone would offer. The trade-off of course is the cost (mezz/pref money is pricey) and complexity (more parties involved).

Structural considerations: Whenever you introduce mezzanine debt or preferred equity, the senior lender will require an intercreditor agreement or similar arrangement. The first mortgage holder wants to ensure any subordinate investor can’t interfere with their first priority or trigger problems. Typically, a mezz lender must sign an agreement with the senior lender acknowledging the senior’s rights and laying out what the mezz lender can and cannot do (for instance, senior lenders often get to approve any transfer of ownership in a foreclosure by the mezz lender). Similarly, preferred equity deals often require notice to the senior lender. The bottom line is you need the cooperation of your first mortgage lender before taking on additional financing behind them. This is not a do-it-yourself process – consult with a real estate attorney to negotiate intercreditor terms and to properly document mezzanine or pref agreements. Also, when structuring preferred equity, pay attention to its exact terms: the preferred return percentage, whether it accrues if not paid currently, any profit share kicker, and the timelines for redemption. Ideally, the preferred equity is redeemable (you can buy out the investor at a certain time, often after a minimum lock-in period) so you aren’t stuck with it indefinitely. Many pref equity investors expect their capital to be returned after 3-5 years, either through a refinance or sale of the property, since it’s not a forever partnership.

In summary, mezzanine loans and preferred equity are flexible financing tools that sit between senior debt and common equity. They allow you to unlock capital while retaining ownership control and avoiding an outright sale. The cost is higher than first mortgage debt, but potentially lower than bringing in a true joint venture equity partner who takes a big slice of your upside. Use them when preserving your primary loan is advantageous and the property’s cash flow can support the extra debt service or preferred return. As always, build in contingency for the exit: these are not permanent solutions. Typically, you’ll need to refinance or sell the asset within a few years to pay off the mezz loan or redeem the preferred equity. Make sure your business plan accounts for that (for instance, you expect NOI growth or a favorable market so that a future refinance can take out the junior capital). When deployed judiciously, mezzanine and preferred equity financing can be a win-win: the owner pulls out equity and leverages their investment further, while still keeping the property, and the mezz/pref investor earns a strong fixed return for their risk position.

Partial Equity Sale (Minority Recapitalization)

Another pathway to liquidity is to bring in an equity partner by selling a minority stake in the property. This is essentially a recapitalization of the ownership structure rather than taking on debt. For example, you might sell a 30% interest in your property to an outside investor (or group of investors) in exchange for cash at today’s valuation. You, as the original owner, retain 70% ownership and typically full operational control (depending on how the deal is structured), while the new investor gets 30% ownership and rights to 30% of the cash flow and proceeds when the property is eventually sold in the future.

Executing a minority equity sale allows an owner to monetize a portion of the asset’s equity without selling the whole property. It’s a way to “have your foot in both camps” – you get some liquidity now, but also keep a stake in the property so you participate in future income and appreciation. Many institutional real estate owners do partial sell-downs of big assets, bringing in a pension fund or private equity partner as, say, a 45% tenant-in-common or JV member, rather than selling outright. This can be especially appealing if the property is a core, long-term hold that the original owner doesn’t want to lose, but they also want to free up capital for other ventures.

Benefits of a partial sale: First and foremost, no new debt is incurred – so there’s no increase in monthly debt service or risk of foreclosure. The cash you receive comes from the investor’s equity contribution. This can make a lot of sense if the property is already leveraged modestly or if debt markets are unfavorable. You also retain significant ownership and usually day-to-day control. In a typical scenario, the original owner (now majority owner) continues to operate and manage the asset, while the incoming minority investor is passive, essentially trusting the lead partner to run the show. From the seller’s perspective, you get to **monetize at today’s market value** – often extracting equity at a premium if the asset has appreciated – while still holding an interest. It also effectively “takes some chips off the table.” If you were concerned about an overheated market or wanted to de-risk, selling a portion crystallizes some gains now and reduces your exposure, while still allowing upside on the remaining share.

Trade-offs and considerations: The obvious downside of a partial equity sale is that you give up a portion of future upside and income. If the property doubles in value over the next decade, your 30% partner will take 30% of that gain – which is capital you would have kept if you hadn’t brought them in. It’s essentially swapping a share of uncertain future gains for a certain pile of cash today. Another consideration is joint decision-making. Depending on the agreement, even a minority investor may require some governance rights. For instance, they might want approval rights on major decisions like selling or refinancing the property, annual budgets, or leases with major tenants. If the investor is truly passive, they might agree to very limited rights (sometimes called “major decision rights” covering only really significant actions). But if they are a sophisticated institutional investor, they will likely insist on protective provisions. This means you will have to get a buy-in from your partner on key strategic moves, which can complicate things. Aligning on a clear exit strategy is crucial: are we holding long-term? Planning to refinance in 5 years? Under what conditions might we sell the property? Ideally, the partnership agreement outlines these or at least provides mechanisms (like buy-sell clauses or rights of first offer) to handle an eventual separation.

Another consideration is valuation: when selling a minority interest, you need to agree on the property’s value. Typically, both parties will get an appraisal or do their own valuation analysis. The price paid for the stake will usually be proportional (e.g. 30% of the total value, perhaps with a slight discount if the minority stake lacks control). Market conditions will influence whether you can demand a premium or might have to concede a small discount for a partial interest. It’s often wise to work with a real estate investment banker or broker who can quietly shop the minority stake to qualified investors, creating a bit of competition to get the best terms.

Who are potential buyers? Minority recapitalizations are often done with institutional capital sources or ultra-high-net-worth investors who want exposure to quality real estate without taking on full management. Candidates include:

• Private equity real estate funds and REITs: These firms often enter joint ventures where they take a 20-49% stake alongside a local operator. They bring cash, while the operator (original owner) contributes the asset and management expertise. Many large funds are comfortable with minority positions if the sponsor is strong.
• Family offices and high-net-worth individuals: A family office might be happy owning, say, 30% of a trophy building as a long-term investment, letting the original owner continue to manage it. They get steady cash yield and diversification, without operational headaches.
• 1031 exchange investors: Sometimes an exchange buyer who sold another property will buy into a fractional interest in a property to satisfy their like-kind exchange requirement. This is often structured as a Tenant-In-Common (TIC) arrangement. For example, if someone needs to reinvest $2 million, they could acquire a 25% TIC interest in a $8 million property. TIC structures allow separate ownership shares (with deeds reflecting undivided interests) that qualify for 1031 treatment. The original owner cashes out that portion via the exchange buyer’s investment. (TIC and Delaware Statutory Trust structures have specific rules to qualify for 1031, so expert advice is needed.)

Successfully executing a minority sale requires careful legal structuring. You’ll need a JV or TIC agreement outlining each party’s rights and obligations. It’s wise to include exit mechanisms (for instance, after a lock-in period, either party can initiate a sale or buyout under predetermined terms) so that if circumstances change, there’s a path to liquidity for both. Also, consider the financial strength and compatibility of your new partner – this is a bit like a marriage. You want a capital partner whose objectives (hold period, risk tolerance, return expectations) align with yours.

One benefit often overlooked: bringing in a credible equity partner can add value through their insights or relationships. For example, an institutional investor might have asset management resources, leasing contacts, or simply enhance the asset’s profile (imagine teaming with a well-known fund – it could attract better tenants or easier refinancing due to their backing). However, in many cases the minority partner is passive and purely financial.

Overall, selling a piece of your property is a prudent way to unlock cash while keeping control. It works best for stabilized, attractive assets that investors would be eager to co-own. You effectively convert a slice of illiquid real estate value into liquid capital, which you can then deploy elsewhere, all while continuing as an owner (just now alongside a partner). As with all strategies discussed, weigh the immediate financial benefit against the long-term cost of sharing your asset. If the property is likely to see modest growth, you might be fine giving up a portion; but if you strongly believe the asset’s value will soar, selling equity could be quite expensive in hindsight. Many owners strike a balance – e.g. sell 30% to get some liquidity now, but retain 70% so they still capture the majority of future upside.

Portfolio Leverage: Lines of Credit & Cross-Collateralization

Thus far we’ve focused on solutions property by property. But owners with multiple assets have additional flexibility. You can potentially tap equity from a group of properties at once through a commercial line of credit or cross-collateralized loan. This approach views your real estate portfolio holistically, allowing equity in one asset to support financing on another.

A common tool is a commercial real estate line of credit, sometimes called a business equity line of credit. This is similar to a home equity line of credit (HELOC) but for commercial or investment properties. Essentially, a bank extends a revolving credit facility secured by one or more properties you own. You can draw funds as needed (up to an approved limit), pay interest only on the amount drawn, repay and redraw, etc. This provides flexibility to use equity incrementally. For instance, a local bank might offer a $2 million secured line of credit against a couple of your free-and-clear properties. You might draw $500k to invest in a new deal, then pay it back after selling another asset, then draw again for a renovation project, and so on.

It’s important to note that commercial real estate lines of credit are less common and typically more conservative than residential HELOCs. Many large banks don’t offer true revolving CRE lines except to very strong borrowers. Those that do will often require significant equity and set low advance rates. According to financial planners, most CELOCs (commercial equity lines) will max out around 50%–65% LTV and often come with higher interest rates than a standard mortgage (source: LendEDU – Commercial Property HELOC Use). In fact, as one analysis explains, traditional HELOCs on homes are common, but “most [banks] don’t extend to commercial property” and those that do impose stricter requirements and higher costs (source: LendEDU – Commercial Equity Line Limits). Typically, a commercial equity line might be a floating rate (tied to prime or SOFR), and as of now those rates could be quite steep (e.g. prime + 1% or 2%, meaning interest in the high single digits). The term might include a draw period (say 2–5 years) followed by a repayment period.

Using portfolio credit strategically: The advantage of a line of credit is agility. You don’t pay interest until you actually need the money, and you can borrow only the amount necessary. This is great for short-term or variable needs – such as funding property improvements, covering unexpected expenses, or making a quick all-cash purchase of another property while you arrange permanent financing. It’s like having dry powder available, collateralized by your existing equity. Some sophisticated investors use a portfolio LOC as a war chest to jump on opportunities (for example, if a bargain acquisition comes up, they draw on the LOC to fund it quickly, then later refinance that new purchase to pay back the line).

However, one should approach these credit lines with caution. They are, after all, loans secured by your properties – not a magic source of free cash. It’s easy to treat a credit line like a big checkbook, but any amount you draw will accrue interest and eventually must be repaid. If the line is floating rate, interest costs can increase if rates rise (which we’ve certainly seen in recent years). And the bank typically has the right to call or not renew the line if your financial condition or the property values deteriorate. In essence, a CRE line of credit carries similar risks to any mortgage. You’re putting your properties on the line (literally) and could face foreclosure if you can’t meet the obligations. In the past, some investors got into trouble by maxing out credit lines to invest aggressively, only to struggle with payments when the economy turned. Use the tool wisely: draw only what you have a clear plan to deploy profitably, and ideally have an exit or repayment strategy (such as selling a property or refinancing with long-term debt) for any large draws.

Another portfolio approach is a cross-collateralized term loan. This is when a lender extends a single loan that is secured by multiple properties together. Instead of separate mortgages on each asset, you have one blanket mortgage covering, say, three properties. The combined equity of all supports the loan. This can be beneficial if you have some properties that are under-leveraged or unencumbered and others that need debt. By pooling them, the lender might allow more cash out overall than each alone would. For example, if you own Property A (worth $5M, no debt) and Property B (worth $5M, with a $2M loan), you could potentially do a new $6M loan secured by both A and B together – using the strength of A to pull more equity from B. Cross-collateralization can also improve loan terms if the pool diversifies risk (e.g. mixing asset types or locations could make the lender more comfortable). Local banks and certain portfolio lenders often do cross-collateral loans for investors with multiple holdings, sometimes even structuring them as a master credit facility that functions a bit like a line of credit (with the ability to release properties when paid down, etc.).

The downsides of cross-collateralization include complexity and entanglement: all the assets tied to the loan are on the hook for each other. If one property hits a snag (like a major vacancy or drop in value), it could put the entire loan in jeopardy or constrain your ability to sell any one property (you’d need to get the lender’s consent and possibly pay down the loan to release that collateral). It can also complicate future refinancing or sales, since everything is tied together. Essentially, it’s “one big basket” – great when all is well, but creating a bigger problem if something goes wrong.

In practice, portfolio-based financing tends to work best for owners who operate their holdings as an integrated business and who aren’t planning to sell individual properties in the near term. It can be a way to unlock equity from a set of assets in one fell swoop, rather than doing multiple individual refis. For example, an entrepreneur with several small commercial buildings might prefer one $10 million loan covering all of them, which could be simpler to manage and might yield a better interest rate or higher leverage than separate smaller loans. Additionally, portfolio loans or lines can sometimes be structured with interest-only periods or flexible terms tailored to the owner’s needs (if you have a strong banking relationship).

The HELOC analogy and caution: Many investors think of these options as akin to a home equity line. It bears repeating that drawing on real estate equity is ultimately borrowing against your ownership. As one financial advisor aptly put it, tapping equity without selling means you’re “reducing your ownership stake” and increasing risk if values fall (source: Bankrate – Hazards of Home Equity Loans). So, while a line of credit or cross-collateral loan can be very useful, it’s not inherently a “great deal” – it’s debt. Often it’s floating-rate debt, which in a high-rate environment can get expensive. Make sure that any capital you take out can at least cover its own cost (for instance, if you invest it elsewhere, aim for returns exceeding the interest rate you’re paying). And maintain discipline not to over-borrow just because multiple properties give you a large borrowing base. In the end, your goal as an investor is to enhance your portfolio’s performance and flexibility, not to jeopardize your holdings with imprudent debt. Used prudently, portfolio credit facilities provide opportunistic liquidity and can fuel growth. But always keep an eye on the overall leverage and have a contingency plan for repayment.

Creative Strategy: 1031 Exchange with Partial Cash-Out

One of the more advanced tactics to unlock equity – particularly for those looking to defer taxes – involves using a 1031 like-kind exchange coupled with selective cash-out maneuvers. A 1031 exchange, under U.S. tax law (Section 1031 of the IRC), allows you to sell an investment property and reinvest the proceeds into another “like-kind” property of equal or greater value, deferring capital gains taxes on the sale. It’s a popular strategy for real estate investors to trade up assets without losing a chunk of gains to taxes, thereby preserving more equity to reinvest. But can it be used to also generate some liquidity? In certain scenarios, yes.

The basic rule of a 1031 exchange is that to defer all tax, you must reinvest all the sale proceeds (and obtain equal or greater debt on the replacement if the relinquished property had debt). Any cash or debt relief you receive is taxable “boot.” However, an investor can structure an exchange to effectively cash out a portion either during or after the exchange, if done carefully.

Exchange into multiple properties – then sell one: Suppose you have a property worth $10 million with very low basis (large built-in gain). If you sell outright, you’d face a big tax hit. Instead, you do a 1031 exchange, identifying two replacement properties: Property X for $6M and Property Y for $4M, for instance. You successfully acquire both, using all $10M of sale proceeds (thus deferring the entire gain initially). Now you own two properties. If your goal was to unlock some cash, you might plan to keep Property X as a long-term hold (perhaps a stable asset for income) and sell Property Y in the near future for liquidity. After a certain period (to be safe from IRS step-transaction concerns, many advisers suggest holding the replacement for at least a year or more), you could sell Property Y. That sale will of course be subject to capital gains tax – essentially you’ll be recognizing the portion of the original gain attributable to that asset (as well as any additional gain if it appreciated further). But effectively, you have managed to defer the taxes up until that second sale, and you only pay tax on that portion rather than the whole $10M. The cash from selling Property Y (after taxes on that portion) is now yours to use freely. Meanwhile, the other portion of your original equity remained invested in Property X, which you still own with deferred gains.

This approach is like breaking one big asset sale into two smaller assets via an exchange, and then cashing out one of them. It doesn’t avoid tax on the cashed-out portion – it just staggers the liquidity event. Why do this instead of just selling the first property and keeping some cash? Because a properly executed 1031 can defer a very large tax bill, allowing you to reinvest more upfront. Even though you’ll pay tax later on the portion you flip out, you had use of 100% of the equity in the meantime (which could be significant if the tax would have taken, say, 25-30% of your gain). The IRS does require that an exchange be done with intent to hold investments, so one has to be cautious about not appearing to do an exchange with a pre-planned immediate sale. The longer you hold the replacement property before selling for cash, the safer the position. Consultation with a CPA or exchange accommodator is a must for timing and documentation.

Refinance after an exchange: Another strategy: complete a 1031 exchange fully (reinvest all proceeds into a new property), then once the new property is in your ownership, do a cash-out refinance on that property. The IRS does not tax borrowed money, and there’s generally no prohibition on refinancing a property you acquired in an exchange. The key here is to avoid an integrated “step transaction” where the IRS could argue the refinance was effectively part of the exchange intent to cash out. As a best practice, investors often wait some time after the exchange (six months, a year, etc.) before refinancing, to demonstrate that the primary intent was to hold the property for investment, and the cash-out refi is a separate decision. If done properly, you can pull equity out of the replacement property with a loan, thereby getting liquidity without breaking the exchange deferral. For example, you sell for $5M, exchange into a $5M property with no cash boot, then a year later refinance the new property with a $2M loan, taking $2M cash out tax-free. Essentially, you’ve achieved similar results to a partial sale – $2M in pocket – but via borrowing. The risk to manage is making sure the loan is reasonable (not pre-arranged the day after closing) and that you can service it.

Delaware Statutory Trust (DST) and fractional options: In recent years, Delaware Statutory Trusts have become a popular vehicle for 1031 investors seeking passive ownership. A DST is an entity that owns property (often large institutional-grade real estate like a portfolio of multifamily or net lease assets), and investors can buy fractional beneficial interests in the trust. Those interests are considered like-kind real estate for 1031 purposes. Some investors exchange out of an active property into a DST interest to “take some chips off the table” in terms of management responsibility. The DST will pay regular distributions (coming from the property’s income). While this doesn’t give you a lump sum of cash, it does convert your equity into a passive income stream, which might be a form of semi-liquidity for some (especially retirees who just want cash flow). Additionally, certain DST offerings have financing and are designed to return a portion of investor capital over time. For example, a DST might take on refinancing after a few years and distribute the refinance proceeds to investors. That results in investors getting some of their principal back (tax-free, since it’s debt financed) while still continuing in the investment – similar to how one might refinance an owned property. It’s worth noting that DSTs come with complex rules (investors have no control, and the trust cannot raise new capital or renegotiate the loan under normal circumstances), but they are a tool for achieving diversification and periodic liquidity events within the 1031 framework.

Caveats: Utilizing a 1031 exchange to maximize equity while trying to also get liquidity requires tight execution. The IRS rules are strict: you have 45 days to identify replacement properties after selling, and 180 days to close on them. You must follow all guidelines (including using a Qualified Intermediary to hold funds). Any cash you receive at the sale (or even as excess borrowing on the replacement purchase) is immediately taxable. That’s why the strategies either involve reinvesting everything and then later extracting cash, or splitting into multiple assets and later selling one. Always consult with a qualified CPA or tax attorney when planning such moves, as the legality can be nuanced. For instance, if you exchange into two properties and sell one very quickly for cash, the IRS might argue the original exchange was partially taxable (they could view it as you really just wanted to cash out part of the original sale – which is true – and thus tax that portion). Proper timing and documentation can mitigate this.

When does this make sense? A partial cash-out exchange is attractive for an owner who has a large tax exposure but still wants some liquidity. It’s particularly useful in estate planning: an older investor might not want to ever pay the capital gains tax (planning to hold until death for a step-up in basis). By exchanging and diversifying into multiple properties or a DST, they can reduce concentration risk and possibly take some money off the table (via refinance or partial sale) to use during their lifetime, all while deferring taxes on the remainder. It’s essentially using the tax code’s deferral to one’s advantage to keep more money invested (or in hand) rather than sent to the IRS. Another scenario: the market for your current property type is very high, so you sell at a peak and exchange into a mix of more stable assets. You defer tax and possibly can extract some cash in the process. You might accept paying tax on a small portion if it means you got liquidity and still deferred the bulk of the gain.

Overall, the combination of a 1031 exchange with careful post-exchange refinancing or selective asset sales can be a powerful way to unlock equity under a tax-deferred umbrella. It’s complex and should be navigated with expert guidance, but for the right situations it achieves multiple goals: continued tax deferral, portfolio rebalancing, and partial monetization of equity.

Choosing the Right Strategy

With a toolbox of options in hand – from refinancing to subordinate debt, from partial sale to portfolio loans and exchanges – how do you decide which strategy (or combination) is best for unlocking your equity? The answer will vary based on your goals, financial profile, and market conditions. Below is a framework of key considerations to help guide the decision:

• Cost of capital: Compare the “cost” of each option in terms of the return or interest you must give up. Debt options (refinance, mezzanine, credit lines) have an explicit interest rate. Equity options (selling a stake) have an implicit cost – essentially the share of future profits and appreciation you are foregoing, which can be quite high if the asset grows significantly. In general, if debt is available at a reasonable interest rate that the property can support, it tends to be cheaper capital than equity. Mezzanine debt, while high interest, might still be less expensive in the long run than giving a 30% ownership to an investor who will take 30% of all future upside. Of course, too much debt raises risk (you have to pay that interest no matter what, whereas an equity partner’s returns are variable and they share downside risk). The optimal solution often blends cost and risk – for example, maintain a moderate first mortgage, consider a small mezzanine piece if needed, but not so much that you are over-leveraged.
• Control and flexibility: If maintaining full control of the asset is a priority, lean toward strategies like refinancing or adding debt, which don’t bring new voices to the table. Bringing in an equity partner, even a minority, means you have a co-owner to consult. Many owners cherish their independence – if that’s you, debt financing might be preferable (assuming you’re comfortable with the obligations). On the other hand, if you don’t mind sharing decisions and are open to a joint venture structure, a partial sale or preferred equity can work. Also think about your desired holding period: a JV partner may want an exit by a certain date, whereas if you refinance, you can often prepay or refinance again later on your own timeline (market permitting).
• Timing and need for liquidity: How quickly and how much cash do you need? If it’s a relatively small amount for a short-term need, a line of credit or small refinance could suffice and is quick to arrange. If you need a very large sum (relative to the property value), a combination (refi plus mezz, or refi plus partial sale) might be required. If you need liquidity immediately to seize an opportunity, pulling from a credit line or doing a cash-out refi will be faster than finding an equity buyer or executing a 1031 exchange (the latter requires finding replacement properties, etc.). Conversely, if liquidity need is part of a long-term repositioning (like restructuring your portfolio as you near retirement), you might undertake a more complex plan like a 1031 exchange into passive assets or a strategic JV, which takes longer but aligns with long-term goals.
• Market conditions and interest rates: The broader environment plays a big role. In a high interest rate environment (like the current climate), pure debt solutions become less attractive due to the carrying cost. Selling a minority stake might be more appealing if equity investor demand is still strong and debt is expensive. In a low-rate environment, you’d likely favor debt (why give up equity if you can borrow cheaply?). Additionally, consider property type and market trends: some assets (e.g. multifamily) might easily attract lenders and equity investors even in choppy markets, whereas others (like offices in 2025) might face tighter credit and fewer buyers – thus pushing an owner to consider whichever option is actually available. If credit is very tight (lenders not lending much, as has happened due to economic conditions (source: NAIOP – CRE Sentiment Index Fall 2023), you might be forced to consider equity capital even if it’s costlier, because the debt markets are closed or loan terms are too restrictive.
• Risk tolerance: Are you comfortable with increased debt and the risk that entails? Some investors are very debt-averse – they sleep better at night owing little or nothing, even if that means slower growth. Those investors might lean towards an equity recapitalization: essentially converting some equity to cash via a partner, while keeping leverage low. Others are aggressive in using leverage to amplify returns and don’t mind a higher debt load. Know thyself. The worst outcome is taking on a structure you’re uncomfortable with or don’t fully understand, only to regret it when conditions change.
• Tax impact: Always evaluate the tax consequences with your CPA. If you refinance or take mezzanine debt, there’s generally no direct tax impact (interest payments are usually tax-deductible as a business expense, making the effective cost a bit less). If you bring in a partner and sell a stake, that’s a taxable event for that portion – be prepared to pay capital gains on the equity you sell. However, sometimes structures like contributing your property into a REIT or fund in exchange for units (an “UPREIT” transaction) can defer taxes on an equity recap – though this is complex and usually done for very large assets with institutional players. If you’re considering a 1031 exchange, the tax deferral benefits might drive the whole decision – you may accept some complexity and limitations of an exchange because avoiding a huge tax hit is paramount. It’s wise to run the numbers: how much net cash do I get in each scenario after taxes and fees? Sometimes a tax-deferred path yields far more reinvestable or usable cash even if it seems convoluted.

In many cases, the optimal solution may be a combination of strategies. For example, you might do a cash-out refinance to get some cash, and also bring in a JV partner for another portion, thereby lowering your debt ratio and getting even more liquidity – a mix of debt and equity. Or you might refinance now (when selling would be suboptimal due to market conditions), but plan to sell or exchange in a few years once the market improves or after you’ve locked in a stepped-up basis for heirs. Always create a long-term plan: unlocking equity is not just about the immediate cash, but how it positions you for the future.

Lastly, consider doing nothing as a benchmark. What if you simply hold the property and don’t extract equity? Is your current financial position strong enough without tapping this asset? Sometimes, the best course is to let well-performing equity continue compounding, especially if all alternative uses of funds seem inferior. The decision to tap equity should be driven by compelling reasons (and “I’m bored and want to do a deal” isn’t a compelling reason!). That said, idle equity can be an opportunity cost – capital that could earn returns elsewhere. The art is in striking the right balance between safety and growth.

Tax and Legal Implications to Note

Every strategy we’ve discussed comes with its own set of tax considerations and legal/financial paperwork. Before pulling the trigger, it’s essential to understand these and consult the appropriate professionals. Here’s a quick rundown of major points:

• Refinancing / Debt Proceeds: As mentioned, loan proceeds are not taxable income. You do not pay income tax when you take a mortgage or line of credit against your property. The flip side is that the interest you pay on the debt is generally tax-deductible as a business expense (for investment properties), although recent tax law changes (e.g. the Tax Cuts and Jobs Act’s limits on business interest deductions) can limit deductibility for certain large real estate owners unless they elect out (which then requires using a different depreciation schedule). Most typical investors still can deduct their mortgage interest, making debt a tax-efficient way to access capital. One caution: if you cash-out refinance and later let the property go into foreclosure or short sale, any debt that is forgiven could become taxable cancellation-of-debt income. So, responsible borrowing is key.
• Selling an Equity Stake: If you sell a minority interest in your property (or the entity that owns the property), it will trigger capital gains tax on the profit allocated to that portion. This can be complex if the property is held in an LLC/partnership – often a Section 754 election can be made to adjust the basis for the new partner, but from your perspective, you are selling part of your ownership, so you’ll calculate gain on that sale. For example, if you originally bought the property for $5M and it’s now worth $10M, selling a 30% stake at market value means you’re realizing roughly $1.5M of gain (30% of the $5M total gain). You’ll owe capital gains tax on that (and depreciation recapture tax attributable to 30% of the accumulated depreciation). There is no automatic deferral mechanism for selling a partial interest – unless you find a way to do a 1031 exchange with that interest, which typically isn’t feasible because partnership interests themselves are not exchangeable (the IRS disallows 1031 for partnership shares). One workaround some use is the “drop and swap” – converting your interest into a TIC interest then exchanging – but that’s advanced tax planning and must be done carefully. Another possibility is an UPREIT contribution: some REITs will allow property owners to contribute property in exchange for Operating Partnership units (OP units), which is a tax-deferred transaction under Section 721. The OP units can later be converted to REIT shares and sold, at which point tax is triggered. This essentially lets you trade real estate for securities without immediate tax, but it’s typically available only for large assets being folded into a REIT’s portfolio.
• Mezzanine and Preferred Equity Structures: Generally, bringing on mezzanine debt or pref equity doesn’t cause a tax event since you haven’t sold anything – it’s a loan or an investment into your entity. One thing to watch: ensure the preferred equity is structured in a way that it’s respected as an equity investment and not recharacterized as a disguised loan or vice-versa. For instance, if a “pref equity” investor’s agreement looks too much like a lender (fixed return, mandatory payments, default remedies that force sale), there’s a chance a court in a bankruptcy or dispute could treat them as a lender, which might conflict with the rights of other lenders. This is more of a legal risk than a tax issue, but it underscores involving experienced counsel to document these arrangements. Additionally, check your mortgage loan documents before taking on mezzanine financing or selling interests – many loans have provisions that either forbid or require lender consent for changes in ownership or new junior financing. You do not want to inadvertently trigger a loan default by taking on a silent partner or a second loan without permission.
• 1031 Exchanges: The tax benefit of a like-kind exchange is powerful – full deferral of capital gains and depreciation recapture if you follow the rules. Make sure to adhere to all timelines and reinvestment requirements. If you receive any cash or non-like-kind property in the exchange, that portion is taxable (called “boot”)(source: IRS – Like-Kind Exchanges Tax Tips). For example, if you sell for $10M and only reinvest $9M, you’ll pay tax on the $1M boot. If your goal was to also get liquidity, you might structure an exchange knowing you’ll have some boot and be okay paying tax on that small piece. With creative exchanges (multiple replacement properties, DSTs, etc.), ensure you’re working with a qualified intermediary and tax advisors who have experience – these can get tricky, and mistakes are costly. Also, be aware that 1031 exchanges currently apply only to real property (since 2018 changes – you can’t exchange equipment or other assets as part of the real estate exchange except perhaps incidental personal property under new rules).
• Legal agreements and due diligence: Any transaction that brings in outside capital (equity or debt) will involve legal documentation. Don’t skimp on this. For loans, thoroughly review loan agreements, as mezzanine and portfolio loans can have covenants that you must mind. For JV equity, a comprehensive operating agreement or tenancy-in-common agreement is needed, covering management, decision rights, profit sharing, exit procedures, etc. It’s wise to have experienced legal counsel for real estate syndication or JV deals draft or review these documents – boilerplate or handshake deals are recipes for future conflict. Additionally, think of financial due diligence: when borrowing, the lender will diligence you and the asset; when bringing a partner, they will diligence the property (and possibly you). Similarly, you should diligence an equity partner (what’s their source of funds, their expectations, their reputation?). If partnering with a family office or private investor, sometimes references or past deal history can be illuminating.
• Consult advisors: Make it a point to consult with a real estate attorney and a tax advisor before finalizing any major recapitalization. They can help identify any hidden pitfalls (for example, transfer taxes or property tax reassessment that might be triggered by adding a new owner – in some jurisdictions, a change in ownership can reassess property taxes, unless structured carefully). If estate planning is a goal, coordinate with your estate attorney – there might be opportunities like gifting some interest to heirs or trusts either before or after the transaction to further your objectives. Basically, treat unlocking equity as a corporate finance exercise: there are legal and financial engineering aspects that professionals should weigh in on.

In summary, while the strategies to tap your equity can be immensely beneficial, they must be executed with a clear understanding of the tax and legal landscape. The good news is that with proper planning, you can minimize or defer taxes (by using exchanges or debt) and avoid unpleasant surprises (like accidentally violating a loan covenant). The key is to approach these transactions as the significant financial events they are: get the right team on board – attorney, CPA, perhaps a financial advisor – to ensure all angles are covered. That upfront cost is well worth preserving your wealth and peace of mind. As one final note: after completing any such transaction, maintain good records. If you did an exchange, keep all the closing statements and exchange documents for that tax year. If you brought in an investor, keep the agreements handy and ensure your accountants account for the new partnership correctly. Good recordkeeping and communication with your advisors will make post-transaction life much easier.

FAQ: Common Questions on Equity Extraction

How much equity can I typically pull out of a property? It depends on the method and the property’s value, but generally lenders will allow a refinance up to around 70%–75% of the property’s current value (sometimes up to 80% in aggressive cases) (source: CommLoan – Equity Limits on Commercial Refi). That means you need to keep roughly 20% equity in the deal. If you already have a loan, the cash-out amount would be the difference between the new loan and the old loan payoff. In practice, most commercial banks are conservative – 65% LTV is common. Additionally, the property’s income has to support the larger loan’s payments (meeting the DSCR threshold). So the true limit is often whichever is lower: the LTV cap or the debt service coverage limit. In a scenario where the property is completely unencumbered (no debt), you might extract 50–75% of its value via a new mortgage. If the property has existing debt, you might only be able to increase the loan modestly if it’s already leveraged. Other strategies like mezzanine financing can add perhaps an extra 10–20% on top of a first mortgage. And if you bring in an equity investor, you could sell whatever stake you agree on (20%, 30%, etc.), which corresponds to that same percentage of total equity value (minus a possible minority discount). Always leave some cushion – you rarely can (or should) pull out 100% of your equity.

Mezzanine debt vs. preferred equity – what’s the difference? Mezzanine debt is a loan (debt) that is subordinate to the first mortgage, whereas preferred equity is an ownership stake (equity) with preferential rights. In practical terms, a mezzanine lender loans you money at a set interest rate and typically will foreclose on your partnership interest (taking over ownership) if you default (source: NREI – Mezz Foreclosure Mechanics). A preferred equity investor contributes money to become a partner and is entitled to a fixed return (and potentially enforcement rights in default, like taking control of the property entity). Mezzanine debt usually has a fixed term and requires periodic interest payments. Preferred equity might receive periodic preferred distributions, but if cash flow is tight they can accrue without causing a default in the same way missing a loan payment would. In a liquidation, mezzanine debt gets paid out before any equity (including preferred equity). Preferred equity gets paid out after all debt but before common equity. Both are “junior capital” and often fill similar financing needs at similar pricing. The choice often hinges on legal factors – some senior lenders don’t allow mezzanine loans but will tolerate preferred equity (since technically it’s not a recorded loan). From the owner’s perspective, mezzanine debt might be slightly more straightforward (it’s a loan with interest, and interest is usually tax-deductible). Preferred equity might be appealing if you want flexibility on payments (since pref equity can sometimes accrue returns if cash is short). But preferred equity means you’re sharing ownership (albeit with defined rights) rather than purely borrowing money. In short: mezz = debt with collateral in your equity; pref = equity with priority rights. Many term sheets these days blur the lines, so focus on the terms more than the name – what is the effective cost, and what rights does the capital provider have if things go wrong?

Is refinancing a good idea when interest rates are high? It can be, but only in the right circumstances. Refinancing in a high-rate environment will lock in a higher interest cost, which means less cash flow from the property and potentially lower loan proceeds (because the higher debt service might constrain the amount you can borrow). If your current loan rate is very low, refinancing now will almost certainly raise your payments – so you’d need a compelling reason to do so (such as a desperate need for cash or perhaps the current loan is maturing and you have no choice but to refi). Many owners are choosing not to refinance right now unless necessary (source: CBS News – Refi Risk in 2023–2024). They are instead seeking alternatives like secondary financing or partial sales to avoid resetting the low-rate debt. However, consider the context: if you have a lot of idle equity and an opportunity to reinvest it at a high return, even a high-interest refinance might make sense. Also, sometimes refinancing for a longer term or fixed rate can be wise even if the rate is high, if you expect rates could go even higher or you want to eliminate short-term refinancing risk. Another scenario: you may refinance to pull out cash and pay off other expensive debts (like personal or business loans that cost even more). It all comes down to the spread – the cost of the new debt versus the benefit/use of proceeds – and your outlook on interest rates. Some investors do a partial refinance (taking less than the max cash) to keep the loan’s interest rate manageable. You could also explore a cash-out refinance with a shorter fixed period (like a 3-5 year hybrid loan) where rates might be slightly lower than a long-term fixed, if you believe rates will come down and you can refinance again later. In sum, refinancing in a high-rate environment is a tougher call, and often it’s about necessity or long-term strategy rather than opportunistic cash-out.

Can I tap my equity without affecting my first mortgage? Yes – through subordinate financing or structures that don’t require touching the first mortgage. As discussed, mezzanine loans and preferred equity are designed to do exactly this: provide you cash while leaving the senior loan in place. They do require the senior lender’s consent, but assuming that’s obtained, your original mortgage remains unchanged. Another way is a second mortgage or home equity loan (for those who own smaller commercial properties, sometimes you can get a true second mortgage) – but in commercial lending, second position loans are rarer, which is why mezzanine financing evolved. If your property is a multifamily or mixed-use, occasionally residential-style equity loans might be available from certain banks. Additionally, a line of credit using the property as collateral can be structured to not disturb the first mortgage (often by recording a junior lien). The key is that any new lender will take a junior position behind the existing mortgage. Technically, you are “affecting” the first mortgage in the sense that you have to make sure your actions don’t violate its terms. But you are not paying it off or modifying it. If your mortgage has a due-on-sale or due-on-encumbrance clause (most do), you must get lender permission. Many lenders will permit a second loan or mezzanine financing if the property and borrower remain solid and they approve the terms (sometimes they charge a fee or slightly increase the first loan rate for the privilege). If lender consent is impossible, one creative method is to bring in a cash partner at the property ownership level (sell them a stake) – that technically doesn’t touch the loan terms if done correctly, though some loans consider change of ownership a default if above a certain percentage, so again, check your loan docs. In short, it is feasible to unlock equity without refinancing the first mortgage, but you’ll be layering another arrangement behind it. Always coordinate with your lender and legal counsel to do it by the book.

How do I find investors to buy a minority stake in my building? Finding the right equity partner can take some networking and marketing in the investment community. A few avenues to consider: (1) **Brokerage and investment banking channels:** Many commercial real estate brokers (especially those in capital markets or investment sales) have clients looking for passive investment opportunities. You can quietly let industry contacts know you’re open to bringing in a JV investor, and they may facilitate introductions. There are also real estate investment banking firms and capital placement agents that specialize in matching owners with institutional capital for joint ventures. (2) **Online marketplaces and platforms:** In the modern era, there are online platforms where you can list equity opportunities. For example, Brevitas (a commercial real estate marketplace) and others sometimes feature off-market opportunities and can connect you with a pool of qualified investors. There are also crowdfunding platforms for real estate that might allow you to syndicate a minority share (though typically that’s more like creating a fund around your property). (3) **Networking with family offices and HNW investors:** Attending industry conferences, local real estate meet-ups, or joining investor networks can put you in contact with family offices or high-net-worth individuals interested in real estate deals. Often these investors rely on word-of-mouth and existing relationships, so tapping into your personal network (lawyers, accountants, and other advisors can sometimes refer interested investors) can help. (4) **1031 exchange buyers:** As noted, someone with 1031 money might be interested in a TIC structure. Let local exchange accommodators or brokers know that your property could accommodate a TIC investment – sometimes they have clients who sold a property and need a replacement and would consider a fractional interest. Lastly, prepare a professional investment summary or “pitch” for your property – serious investors will want to see the financials, leases, and your business plan. They’ll need to underwrite the deal to justify the investment. It often starts non-binding (discussions or a letter of intent) and then if there’s mutual interest, moves to a formal agreement and due diligence process. Engaging an attorney early to help structure the offer (what % for what price, with what terms) can also make the opportunity clearer to investors.

What are the risks of bringing in a JV partner? The biggest risks are loss of full control and potential conflicts down the road. Once you have a partner, you’ll need to consider their interests and potentially get their consent on major decisions. If you and your partner disagree on strategy – say, you want to hold long-term but they want to sell in five years – that can create friction and possibly legal disputes. That’s why it’s crucial to spell out decision-making and exit plans in the JV agreement. Another risk is that the partner may encounter financial problems or a change in circumstances that affect the property. For instance, if the partner is responsible for future capital contributions (for repairs or improvements) and they fail to fund their share, you might have to cover or suffer the consequences on the property. A well-drafted agreement will have remedies for such a situation (like dilution of their interest if you cover their part). There’s also the interpersonal dynamic – if your partner is not truly passive, they might second-guess management decisions or become a thorn in your side if the property hits a rough patch. You could end up effectively “reporting” to someone or wasting time on partner meetings instead of running the property. Additionally, any time you share sensitive financial information, you’re trusting another party with that data – confidentiality and trust matter. From a financial perspective, a partner takes a share of cash flows, so your monthly/quarterly income from the property will drop proportional to their stake; if the property has thin cash flow, this could strain your own cash returns, especially if you were relying on that income. Lastly, when it comes time to sell the property outright, you’ll need alignment. If the market is right but your partner hesitates (or vice versa), you might miss optimal timing. Many JVs include clauses like “forced sale” rights after a certain hold period, but exercising those can be contentious. In summary, partnering introduces complexity – it can be very rewarding if the relationship is positive and the deal performs, but it carries the risk of disputes and the certainty of sharing your upside. Weigh those against the benefit of the capital and risk-sharing the partner provides.

What are the tax consequences of these different strategies? In brief: debt-related strategies (refinance, credit lines, mezzanine loans) do not create taxable income as long as you are simply borrowing money. You can generally deduct the interest expense, which softens the cost. If you later default and debt is forgiven, that could be taxable, but assuming you pay as agreed, no taxes on the proceeds. Equity sale strategies (selling a minority interest) trigger capital gains tax on the portion of the property sold. You’ll calculate gain based on the share of the asset’s basis and the price paid. Depreciation recapture will also apply proportionally. That tax will be due in the tax year of the sale. If instead you contributed the property to a partnership or REIT in a tax-deferred manner (uncommon but possible), you could defer tax, but eventually when you cash out of that structure you’d pay tax. Mezzanine financing and preferred equity typically have no immediate tax impact (you’re not selling anything). However, note that the interest on mezzanine debt is deductible; the preferred equity “preferred return” is not interest, it’s an equity distribution, so from your entity’s perspective, that part of cash flow is not a deductible expense – it’s a distribution of profit (which may actually help your tax position because you as the common equity might show less profit to be taxed if most of the cash went to the pref, but it’s not an interest write-off). For the pref investor, their return might be treated as investment income or operating profit depending on the structure, but that’s on them. 1031 exchanges, if done correctly, allow you to defer 100% of the capital gains and depreciation tax that would otherwise be due on a sale. The exchanged-into property takes on the old property’s basis and depreciation track. When you eventually sell without exchanging, the taxes catch up. If you pass away holding the property, the deferred gain often gets wiped out by the step-up in basis (one reason 1031 is a powerful estate planning tool). If you receive any cash (boot) in an exchange or fail to reinvest the full amount, that portion is taxed in that tax year. For instance, some people do a partial 1031 – they reinvest most but pocket a little cash to pay some bills; that pocketed cash is taxed. With exchanges, watch out for state taxes too – some states have their own rules and even “clawback” provisions if you leave the state with your exchange property. Always consult your CPA to quantify the tax impact before and after any equity-unlocking move. A good advisor can also help time things in a tax-efficient way (for example, doing a refinance in the same year as a cost segregation to create extra depreciation offset). There’s nuance, but broadly, debt = no tax, equity sale = tax (unless deferred), exchange = tax deferred.

Can I do a 1031 exchange and still get some cash out? Not directly at the moment of the exchange – if you receive cash in the exchange it will be taxable. However, there are two main ways to combine exchanging with cash-out: one, as discussed, is to perform an exchange into one or more properties and later refinance those properties to pull cash out (after a prudent delay). That way you’ve deferred the initial sale tax via the exchange, and then gotten liquidity through borrowing (which is not taxed). Two, you could purposefully exchange into multiple properties of lesser total value and accept that you’ll pay tax on the difference (boot). For example, you sell for $5M, and exchange into properties worth $4.5M, meaning you kept $500k out as cash boot – you’ll pay tax on that $500k, but you successfully deferred the rest. Some investors do this if they only find $4.5M of suitable replacements – they figure paying some tax is fine. A variation of that theme: exchange into one property, but structure the purchase such that you assume less debt or take out some equity at closing. If a replacement property involves new financing, any excess cash can’t go to you or it blows the exchange – but sometimes creative folks over-leverage the replacement and use extra loan funds to cover things like repair costs or fees, indirectly freeing up other cash (this gets into gray areas – not recommended without expert counsel). The more straightforward method is: exchange fully, then refinance. The IRS has not provided a safe harbor timeline, but many tax advisors suggest that if you wait at least 6-12 months after the exchange to do a refinance, you’re generally in a defensible position that the refi was not “part of the exchange”. It’s even better if there’s a sound business reason (e.g. market rates dropped, or the property’s value increased post-improvement allowing a refi). The second technique is to partially exchange and accept boot. So yes, it’s possible to get cash out while doing a 1031, but either you pay some tax on that cash, or you take the cash as a loan after completing the exchange. What you shouldn’t do is try to secretly take cash during the exchange via the accommodator – that will violate the rules. Always follow the letter of the 1031 process, and structure any cash-out either as a known boot or as a subsequent separate transaction.

Final Insights: Liquidity Without “Selling Out”

Real estate investors today sit on unprecedented amounts of equity wealth locked inside their properties, thanks to decades of appreciation. Unlocking that capital without selling the asset is a nuanced art, but one that can significantly amplify an investor’s financial flexibility and portfolio strategy. The key theme across all the strategies we covered is balance – extracting equity while still maintaining control and future upside in the property. In effect, you’re trying to have the best of both worlds: get cash now for other uses, yet continue owning and benefitting from your real estate.

An owner who adeptly accesses equity can use that cash for myriad strategic advantages. It may fund the down payment on a new property (effectively growing the portfolio using the original asset’s value), finance value-add improvements on other holdings, or diversify into different asset classes or markets. Some take equity out to invest outside of real estate, whether into stocks, businesses, or other ventures – turning an illiquid asset into capital that can be reallocated dynamically. Others use it for personal reasons like estate planning (gifting some cash to heirs early, or funding trusts) or philanthropic endeavors, all while still keeping the property in the family. The point is, liquidity creates options. Historically, real estate has been considered relatively illiquid – but tools like refinancing, secondary financing, and structured sales dramatically improve liquidity while keeping you in the game.

However, a caution: just because you can extract equity doesn’t mean you should max it out. Retaining a solid equity stake in your properties is crucial for weathering market fluctuations and downturns. The investors who ran into trouble in past crises were often those who pulled out too much and over-leveraged. Prudent investors treat unlocked equity as a resource to be redeployed wisely, not squandered. Ideally, the capital you take out should either improve your overall returns (by being invested at a higher yield elsewhere) or improve your risk profile (e.g. paying down expensive debt, or adding resiliency to your finances). If you simply cash out to spend on depreciating personal assets, you may undermine the wealth-building engine that real estate provides.

Control was a recurring consideration in each strategy. One of the beauties of real estate ownership is the autonomy it gives – you can make decisions to add value. When bringing in partners or additional stakeholders (be they lenders or equity investors), an owner gives up a degree of that control. There’s no one-size-fits-all answer; some owners will never want partners, others welcome the collaborative approach or don’t mind the trade-off. The important thing is that any equity-unlocking move aligns with your long-term objectives. If maintaining a legacy property for future generations is paramount, you might lean toward debt solutions or very passive equity (like family members as partners or a structure that allows you to eventually regain full ownership). If growth and expansion is the goal, you might be more willing to dilute ownership or take on high leverage, as long as it fuels bigger acquisitions.

We also highlighted the role of current market conditions, especially interest rates. The current high-rate cycle will eventually turn – and when it does, some strategies that were put on hold (like refinancing) might resurface as attractive. Savvy investors keep an eye on the capital markets; sometimes the window for a favorable move is small. For example, if interest rates dip significantly at some point, a refinance to pull cash might suddenly pencil out well – one should be ready to execute quickly (perhaps by lining up appraisals or loan approvals in advance). Similarly, if property values in your sector are peaking, that might be the moment to consider selling a stake or doing an exchange to lock in the value. In essence, always be scanning: where is the market now, and which tool is best suited for this environment?

Finally, don’t underestimate the importance of professional guidance. The most successful outcomes usually involve a team – your broker or investment advisor finds the right capital partners, your attorney structures the deal and protects your interests, your CPA makes sure it’s tax-efficient. The cost of these professionals is typically a small fraction of the value of the equity you’re unlocking. And with significant dollars at play, mistakes can be very expensive (far more than some legal fees!). As one adage goes, “measure twice, cut once.” Plan the move carefully, execute methodically.

In conclusion, unlocking trapped equity without selling is not just a financial maneuver – it’s a strategic decision that can propel your real estate business to the next level or solve key challenges. It allows you to convert paper wealth into working capital while continuing to own and operate the assets you know and love. With thoughtful execution, you truly don’t have to “sell out” in order to get liquidity. You can keep control, preserve the upside, defer taxes, and still reap the benefits of the wealth your real estate has created. It’s a powerful combination that, when done right, strengthens both your current position and your future prospects.

References

• Urban Land Institute – Rising Rates and Liquidity Challenges in CRE
• Federal Reserve Press Release – July 26, 2023 (Interest Rate Hike to 5.5%)
• CommLoan Academy – What is a Commercial Cash-Out Refinance?
• NAIOP Sentiment Index Fall 2023 – High Rates Impact on Refinance
• LendEDU – Commercial Equity Lines of Credit (CELOC) Explained
• GowerCrowd – Preferred Equity vs. Mezzanine Debt in Real Estate
• Internal Revenue Service – Like-Kind Exchanges: Real Estate Tax Tips (Section 1031)
• CBS News – “Trapped” Home Equity in a High-Rate Environment
• Bankrate – The Hazards of Tapping into Home Equity
• Tyler Cauble (Broker) – Partial Interest Recapitalization Example