Summary: This subject matter expert roundup explores how lenders and developers de-risk real estate projects in 2026. See real insights on pre-underwritten dual-exit strategies, and contingency planning from actual private lenders.

The optimism fueled by the rapid 2021-2022 home value growth caused many developers to underwrite projects around a single "Plan A" exit. When markets softened and foreclosures rose in places like Tampa, Riverside, and Cleveland in 2025, deals with no fallback were unable to exit before loan maturity.

A major contributor to increased delinquencies was high carrying costs. Property taxes, insurance premiums, interest rates, and HOA dues have all spiked. Prolonged hold times in many markets drain equity and make a traditional sales exit unfeasible without an investor bringing cash to the table.

For this reason, top private and hard money lenders now require borrowers to prove a viable, stress-tested "Plan B" upfront. This has to be pre-underwritten as a fall back for the retail sale exit.

We wanted to see how this works and what lenders are doing these days to protect their capital. So we reached out to private real estate lenders and construction lending experts, from private lenders funding developer deals to fix-and-flip lenders. We wanted to know these things:

(1.) What they need to see before funding,

(2.) When they revisit the exit strategy, and

(3.) What backup exits they've approved.

Here are the responses we received.

The Green Flags

Question: We all know "Plan A" is for the project to be a home run. But nowadays, lenders have to look at "Plan B" and "Plan C." What are examples of backup plans that you like to see before funding a deal?

“Before funding a deal, we look at:

Project feasibility (likelihood the project will get a new loan)

Borrower strength and resourcefulness (the borrower’s ability to “make it happen”), and

The market (is there/will there be sufficient absorption in the market for this to get leased/sold/re-financed?)

All three factor in, and are given different weight, depending on the transaction.”

Joffrey Long, President of South West Bancorp

"We require a clearly defined primary exit, typically refinance or sale, supported by a realistic path to execution. That said, we’re not underwriting to a best-case scenario. We want to see that the deal works today based on the asset, the borrower’s basis, and the equity in the deal.

The stronger the equity position and the lower the as-is leverage, the more flexibility we have to structure the loan favorably to the borrower and move quickly.”

Daniel Paloscio, President, SEP Capital

“As a commercial construction lender we require at least two clearly defined and documented exit strategies before funding: a primary exit and a secondary (backup) exit. If the primary exit is a sale, the borrower must provide:

• A Broker’s Opinion of Value (BOV) from a reputable, local brokerage

• Comparable sales supporting projected pricing

• Identification of the likely buyer pool

• A defined absorption timeline

• Sensitivity analysis reflecting potential pricing declines

Minimum standard: The project must demonstrate the ability to sell at a price sufficient to repay the loan with a 10–15% margin for error.

If the primary exit is a refinance, the borrower must provide:

• Pro forma debt service coverage ratio (DSCR) of at least 1.20–1.30 at stabilization

• Market rent comparables

• Conservative cap rate assumptions

• LOIs from takeout lenders

Minimum standard: The refinance scenario must remain viable under higher interest rates and lower valuation assumptions.

We also require a statement from our borrowers regarding a backup exit strategy.”

Corey Dutton, Founder, High West Lending

“Before funding, most lenders expect borrowers to have at least one clearly documented primary exit strategy and a credible backup. The minimum standard most lenders require covers:

• Sale of the completed property — a comparative market analysis or broker price opinion supporting the projected ARV, along with evidence of comparable sales in the area. This is the most universally required item.

• Refinance path — if the borrower intends to hold the asset, a realistic debt-service analysis showing they can qualify for permanent financing at or near stabilization, including projected rents if it's income-producing.

• Takeout commitment or term sheet — for larger projects, many lenders want a conditional commitment from a permanent lender already in hand at closing, not just a verbal plan.

• Equity position documentation — proof that the borrower has sufficient skin in the game relative to LTC and ARV.

The ARV must credibly support the total loan amount with enough cushion to cover construction costs, cost overruns, carrying costs, and sale expenses.”

Ashley Winter, President, BuildCheckPro

The Timeline for Intervention

“An exit strategy review is triggered when 70–80% of the loan has been funded or the project reaches 60–75% completion.

Additional trigger events include: reserve depletion: 50% utilization prior to stabilization; a project delay: more than 60 days behind schedule; budget overruns exceeding between 5–10% of budget depending on project size and scope; or market changes: rental rates decreasing, interest rate increases, or cap rate increases.

How is this enforced? Our loan documents include a requirement that the borrower provide an updated exit strategy analysis upon request, or upon the occurrence of any trigger event.

Although not ideal and rarely enforced, we may suspend funding of future draws until the borrower complies with any requirements. If the exit strategy has deviated too far from initial assumptions, we may require an updated appraisal or BOV, an updated rental analysis, and additional equity injection from the sponsor.”

Corey Dutton, Founder, High West Lending

Question: What's your take on timing - should exit strategy agreements be revisited at project milestones, or locked in completely upfront?

“A review of the Exit Strategy should be undertaken as the maturity date approaches or if the Interest Reserve Budget is approaching exhaustion.

Most borrowers are anxious to refinance their project and the maturity date coupled with usually lower interest rates on take-out financing is a natural motivator.”

Darren K. Proulx, Owner, Newmark Investment and Loan, Inc.

“The right trigger depends on project type, but the most defensible ones are:

• Framing/dry-in — for ground-up construction. Scope changes after this point get expensive and the project trajectory is largely set

• 50% tenant occupancy — for income-producing or multifamily projects where the refinance or sale exit depends on demonstrated income

• Certificate of Occupancy — for new construction and for fix and flip. Once the CO is issued, the clock runs against the maturity date

• Any draw with a significant cutback — regardless of project type, a major reduction in approved draw amount signals the original budget and timeline assumptions need revisiting

On enforcement, the most effective lenders tie reviews to something the borrower actually needs, such as the next draw, an extension, or a modification. Milestone-based reviews without a corresponding gate the lender controls tend to be inconsistently enforced.

The most reliable mechanisms are draw conditions written into the loan documents and maturity extension requirements, both of which force the borrower to resubmit updated exit documentation before getting what they need.”

Ashley Winter, President, BuildCheckPro

Viable 'Plan B' Options

“Example backup exit strategies include:

- Sale as backup to refinance

- Refinance as backup to sale

- Additional equity injection

- Debt recapitalization

Minimum standard: The backup exit must demonstrate the ability to fully repay the loan under stressed conditions.

The sponsor must also have additional liquidity equal to at least 10% of the loan amount. This gives the sponsor the capacity to cover interest shortfalls, budget overruns, or extended carrying costs. Sponsors must also be willing to provide a completion guarantee.”

Corey Dutton, Founder, High West Lending

“When funding a development loan, there are typically a few exit strategies.

Refinance with a permanent loan. Many loan programs become available once construction is complete.

Sometimes, the project will need to season or reach a certain occupancy before certain permanent "take-out" loans become available. In these cases, a Bridge Loan becomes necessary to "bridge" the gap between the construction loan and a permanent loan.

Knowing the permanent and bridge loan underwriting guidelines is important when underwriting a development/construction loan.

Ultimately, it is always the equity that will protect the Private Money Lender.

Darren K. Proulx, Owner, Newmark Investment and Loan, Inc.

In construction lending, phased sales and pre-arranged partner buyouts could also be viable backup exits.

Conclusion

This article has examined why a single exit strategy is insufficient in 2026. Default risk is higher as carrying costs and buyer demand are slow. Developers and lenders have to be proactive with derisking deals through pre-written dual exits, carrying cost buffers, and establishing mid-build reviews. Upfront contingency planning protects both project equity and capital in an unpredictable market.

Agnes Gaddis is an experienced real estate content writer and PR specialist, helping real estate investing and lending brands diversify their lead sources and build long-term authority and visibility through content marketing and distribution. See her portfolio.

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