How to Use Soft Deposit Financing on a CRE Contract

An earnest money deposit is at risk once the contract's due diligence period expires or the buyer takes an affirmative step, like waiving a financing contingency, that makes the deposit non-refundable if the deal does not close. Up to that point, the deposit is typically refundable if the buyer walks for a permitted reason, so the capital is not truly at risk yet.

The moment of real exposure is when the buyer decides to go hard, meaning waive remaining contingencies and commit to closing, often because a seller requires it to keep the deal on schedule or because the buyer's own financing and diligence are far enough along to justify the commitment. From that point forward, losing the deposit is a real financial consequence if the deal falls apart.

Soft deposit financing is a short-term facility that funds part or all of an earnest money deposit once it becomes at risk, so the sponsor is not committing its own cash, or is committing less of it, to a deposit that could be forfeited if the deal does not close for a reason outside the sponsor's control. It is sized to the deposit amount and the specific window between going hard and closing.

It is not a substitute for the acquisition loan; it is a bridge for the deposit specifically, typically repaid or rolled into the permanent financing at closing. A sponsor pursuing several deals at once, or one deposit that is large relative to available liquidity, uses soft deposit financing to keep capital available for other opportunities rather than tying it up in a single at-risk deposit.

The facility term should map directly to the contract's own timeline: it typically starts at or near the point the deposit goes hard and runs through the scheduled closing date, plus a reasonable buffer for a closing that slips by a few weeks. A facility term shorter than the realistic closing timeline forces a scramble to extend it right when the deal needs full attention on closing logistics instead.

As an illustration, a contract with a due diligence period ending in 45 days and a scheduled closing 90 days after that might use a soft deposit facility structured for a 5 to 6 month term, covering the hard deposit date through closing with a buffer for a typical delay in due diligence completion or lender timing.

Once a deposit goes hard, it typically moves into or remains in an escrow account controlled by a title company or escrow agent under the terms of the purchase agreement, rather than being held by the seller directly. Soft deposit financing funds that escrowed amount, and the facility documents typically require the escrow agent to acknowledge the financing party's interest in the deposit.

That acknowledgment matters because it confirms how the deposit gets applied, and to whom, if the deal closes, and how it gets returned or forfeited if the deal does not close for a covered reason. Reviewing the escrow instructions alongside the soft deposit facility documents before funding avoids a mismatch between what the purchase agreement says and what the financing facility assumes.

Going hard is the specific act, usually a written notice or the simple expiration of the due diligence period without a termination notice, that converts a refundable deposit into a non-refundable one under the purchase agreement. It is the trigger point most soft deposit facilities are built around, since it is the moment the capital genuinely needs protection.

A sponsor should confirm the exact mechanism and date the contract uses to go hard, since some contracts require an affirmative notice while others go hard automatically if no termination notice is sent, and that distinction changes when the soft deposit facility actually needs to be in place and funded.

The facility should size to the actual at-risk deposit amount, not the full purchase price or an unrelated round number, and should account for whether the deposit increases at any point in the contract, which is common on longer due diligence periods with a scheduled deposit increase.

As an illustration, a $30,000,000 acquisition with a $1,500,000 initial deposit that increases to $2,500,000 once the buyer goes hard needs a facility sized to the $2,500,000 figure, not the smaller initial amount, since that is the exposure the sponsor is actually protecting once the contingency period ends.

At closing, the soft deposit facility is typically repaid from the proceeds of the permanent financing, whether that is the acquisition bridge loan, a mezzanine or preferred equity layer, or the sponsor's own equity contribution, so the deposit financing does not remain outstanding as a separate piece of the long-term capital stack.

Coordinating this with the same lender providing the acquisition financing, when possible, simplifies the closing, since the deposit facility and the acquisition loan can be structured to close simultaneously with the deposit repayment as a line item on the closing statement rather than a separate transaction to unwind under time pressure.

The most common mistake is waiting until the deposit is already hard, or nearly so, to start arranging financing for it, which compresses the time available to document and fund the facility right when the sponsor has the least flexibility to delay. A second is sizing the facility to the initial deposit amount and overlooking a scheduled deposit increase later in the contract.

A third mistake is failing to confirm the escrow agent will acknowledge the financing party's interest in the deposit, which can create confusion about how the deposit gets applied or returned. A fourth is not coordinating the deposit facility's term with the realistic closing timeline, leading to an extension scramble right before closing.

H Equities evaluates and provides soft deposit financing from $500,000 to $5,000,000, structured around a specific purchase contract's timeline and deposit dates, and also evaluates and structures first mortgage bridge loans, mezzanine loans, preferred equity, and co-GP equity for the acquisition itself. Sponsors bring in H Equities once a contract is far enough along to define the deposit amount, the date it goes hard, and the scheduled closing date the facility needs to be structured around.