The distressed real estate market in New York and New Jersey is producing some of the most complex financing situations in recent memory. Partner disputes, stalled construction projects, technical payment defaults, and foreclosure proceedings are landing on lenders’ desks at a rate that has left many institutional players stepping back entirely. For borrowers caught in these situations, the gap between a viable exit and a total loss often comes down to one question: is there a lender who will actually look at this deal?

The answer, increasingly, depends less on the state of the asset and more on how deeply a lender understands the local market, the borrower’s position, and the realistic path to resolution.

Underwriting distressed deals is not about risk tolerance in the abstract, says Ruben Izgelov, Co-founder of We Lend. It is about having enough market knowledge to know the difference between a deal that is genuinely unworkable and one that just requires more patience, more structure, and a different set of tools.

The conventional reaction to a distressed asset is to treat it as a category to avoid. Many lenders, particularly those operating at scale across multiple markets, apply broad filters that exclude anything with a default, an ongoing dispute, or a construction stoppage. The logic is understandable. Without deep market familiarity, it is genuinely difficult to assess whether a stalled project in a specific Brooklyn neighborhood will resolve favorably or deteriorate further.

But this blanket avoidance creates a real gap in the market. Borrowers who have viable exits, real equity, and legitimate paths to completion are being turned away not because their deals are bad, but because most lenders lack the local knowledge to evaluate them properly. The result is a class of borrowers who need capital the most and are least able to access it through conventional channels.

In the New York and New Jersey market specifically, that gap has widened considerably as banks have pulled back from construction lending and private credit funds have grown more selective. The borrowers left standing are often experienced operators with workable situations, facing a financing environment that offers them very few doors.

Evaluating a distressed deal requires a fundamentally different framework than evaluating a standard bridge loan or ground-up construction project. The future value of the asset becomes largely irrelevant. What matters is the as-is value today, and how conservatively leverage can be structured against it.

For complex situations, a maximum loan-to-value in the range of 55 to 60 percent of the current as-is value is a starting point, not a ceiling. In markets or submarkets where exit demand is uncertain, that figure comes down further. A property in certain parts of Trenton, New Jersey, for example, may warrant a loan at 50 percent of as-is value even if the same underwriting approach would allow 60 percent elsewhere. The reason is not just the asset’s value, it is the depth of the buyer pool and the liquidity of the surrounding market.

This is where hyper-local market knowledge becomes a genuine underwriting tool. Knowing which neighborhoods have sustained buyer demand, which submarkets are thinning, and which areas are seeing distressed inventory pile up gives a lender the ability to structure deals that balance capital preservation with the borrower’s need for a real solution. Without that knowledge, the numbers on paper may look manageable while the actual exit risk is substantial.

One of the structural realities of distressed financing is that borrowers frequently have to bring equity to the table. In situations where an existing lender needs to be taken out and the as-is value supports only partial refinancing of the outstanding balance, the borrower must cover the gap. This is not punitive. It is a structural mechanism that aligns the borrower’s interest with a successful resolution.

A borrower who can bring equity into a distressed situation is demonstrating two things simultaneously: they have resources available, and they believe in the deal’s outcome enough to put those resources at risk. Both of those signals matter to a lender evaluating whether the deal has a real path forward or is simply an attempt to delay an inevitable loss.

The equity requirement also changes the risk calculus of the deal itself. When a borrower is carrying 40 percent or more of equity ahead of the lender, the lender’s position is substantially protected even in scenarios where the exit takes longer than anticipated or the market softens modestly.

No discussion of distressed New York real estate is complete without addressing rent-stabilized properties. The regulatory changes of recent years have compressed values significantly in this asset class, and many operators who have held rent-stabilized portfolios for years are now facing maturities with no viable refinancing option. Values have dropped by 50 to 60 percent in some cases, and operators are walking away from properties rather than bringing equity to the table to refinance at current values.

As a category, rent-stabilized assets warrant caution. But caution does not mean automatic exclusion. A mixed-use Brooklyn property acquired at a foreclosure auction for roughly half of what it traded for six years prior presents a very different risk profile than the same building purchased at peak pricing. The question is not whether the asset class carries regulatory risk, which it does. The question is whether the specific transaction economics justify the exposure.

In that Brooklyn example, leverage at 46 percent of a purchase price already representing a steep discount to a prior trade creates a cushion that changes the nature of the risk entirely. Common sense underwriting is not about ignoring categories. It is about understanding why a category carries risk and determining whether the specific deal structure accounts for it.

The non-negotiable in any distressed deal is a credible exit. For a lender evaluating rescue capital situations, this means going beyond the borrower’s stated intention to resell or refinance and actually stress-testing that outcome against market conditions.

A property in foreclosure with an operator who plans to renovate and resell needs a realistic assessment of renovation timelines, local comparable sales activity, and whether there are buyers in the market at the price point required to make the deal work. A stalled construction project needs an honest evaluation of what it will actually cost to complete, not just what the borrower estimates. A partner dispute resolution needs clarity on whether both parties are aligned on an exit or whether litigation will consume the timeline.

Lenders who skip this analysis in favor of the headline leverage ratio are setting themselves up for problems. The leverage may protect them in a clean default scenario, but distressed situations rarely unfold cleanly. The lenders who perform well in this space are the ones who understand that the deal structure is only as good as the exit it is built around.

Ruben Izgelov is the Co-Founder and Managing Partner of We Lend, a private real estate lender specializing in bridge loans, ground-up construction, and complex situation financing across the New York and New Jersey markets.

This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.

Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.

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