Non-Traditional Collateral: A Smarter Way to Grow Your Lending Portfolio

There’s a conversation happening more and more in commercial lending circles, and if you haven’t had it yet, you probably will soon. Borrowers are coming to the table with assets that don’t fit neatly into a conventional underwriting box, and the lenders who know how to work with those assets are quietly expanding their footprint while others are turning deals away.

We’re talking about non-traditional collateral. Things like air rights, transferable development rights (TDRs), and environmental credits. These aren’t exotic concepts reserved for major institutional players. They’re real, securitizable assets that are showing up in more California deals than most people realize, and they deserve a serious look.

Why Most Lenders Pass on These Assets

The hesitation is understandable. Non-standard collateral doesn’t have an MLS entry or a clean comparable sale from last quarter. It requires more due diligence, more specialized knowledge, and sometimes more patience to explain to a credit committee. The easy move is to decline and wait for a deal with a cleaner collateral profile.

But here’s what that approach is actually costing you: opportunity. A borrower sitting on a parcel with significant air rights or a portfolio of carbon credits isn’t a bad credit risk by default. In many cases, these are sophisticated, well-capitalized operators who simply don’t have the right lender at the table. If you’re not that lender, someone else will be.

What These Assets Actually Are

For California lenders, context matters. Air rights represent the development potential above a property, and in markets like Los Angeles and San Francisco, where density is at a premium, they can carry substantial value. A property owner who has already built to a certain height may be sitting on unused vertical space that can be sold or leveraged, often through a legal instrument attached to the underlying real estate.

Transferable development rights operate similarly. They allow unused development capacity from one parcel, often in a restricted or historic zone, to be transferred to another site where greater density is permitted. California municipalities have increasingly adopted TDR programs as a planning tool, which means the underlying legal framework is becoming more established, not less.

Environmental and carbon credits are a different animal, but increasingly a bankable one. As California continues to lead the country in climate-related policy, the voluntary and compliance markets for carbon offsets, water credits, and conservation easements are generating real cash flow and real asset value for landowners and project developers alike.

Structuring It Safely

The word “risky” gets thrown around when this topic comes up, and frankly, some of that reputation is earned when these assets are handled carelessly. But risk is manageable when structure is sound.

The first thing to get right is valuation. These assets require qualified appraisers with specific expertise, not a generalist who can pivot from a strip center to a TDR portfolio. In California, there are appraisers who work specifically within the development rights space, and engaging them early in the process is not optional, it’s foundational.

Second, understand the legal transfer mechanism. Air rights and TDRs are creatures of local zoning law, which varies significantly from jurisdiction to jurisdiction in California. A structure that works in Santa Monica may not translate to Sacramento. Your title company and real estate counsel need to be fluent in the applicable municipal framework before you commit to anything.

Third, consider how you’re securing the collateral. In many cases, the most defensible approach is to tie the non-traditional asset to a lien on the underlying real property, treating it as a pertinent interest rather than a standalone pledge. This gives you a cleaner enforcement path if things go sideways, and it’s a structure that tends to sit better with credit committees.

Finally, think through liquidity. Traditional collateral is appealing in part because there’s a market for it. The market for air rights or carbon credits is thinner and more specialized. Build that reality into your LTV calculations and your exit assumptions from the start.

The Competitive Angle

California’s development landscape is constrained in ways that are only getting more pronounced. Infill development, adaptive reuse, and density-driven projects are where a significant portion of new lending opportunity is being generated. Many of those projects will involve non-traditional collateral in some form, either as primary security or as a sweetener to a larger deal structure.

The lenders who understand these assets and can underwrite them confidently will have a meaningful edge. Not because they’re taking on more risk, but because they’ve built the expertise to manage it properly, and borrowers who work in this space will seek them out.

It’s worth investing the time now to build those relationships with the right appraisers, attorneys, and title professionals. When the deal is on the table, you’ll be glad you did.