Key Takeaways
- Debt is 65–75% of the capital in every deal. Financing decisions affect cash-on-cash returns, refinance risk, and flexibility more than most investors realize
- We use bridge loans for acquisition and renovation, then refinance into permanent debt once the property is stabilized. The refinance is where investor capital gets returned
- We underwrite to current rates — not projections of where rates might go. If a deal only works with a rate decline, it doesn't work
In the syndication and investment world, the conversation usually starts with equity: who's investing, how much, what's the return. But equity is the minority of the capital in almost every deal. On a typical acquisition, debt represents 65 to 75 percent of the total capital. The terms of that debt — rate, term, amortization, recourse, and flexibility — shape the return profile more than most investors appreciate.
We think about financing as a tool, not an afterthought. The wrong debt structure can turn a good deal into a mediocre one. The right structure gives us flexibility to execute the business plan and return capital to investors efficiently. Here's how we approach it.
The Capital Stack, from the Debt Side
Take a straightforward value-add acquisition: a $2.5 million purchase price, plus $300,000 in renovation costs, plus $100,000 in closing costs and reserves. The total capital requirement is $2.9 million. How you fill that stack determines everything downstream.
A typical structure: $1.75 million in debt (roughly 70% of the purchase price) and $1.15 million in equity. The debt service — interest, and eventually principal — comes out of the property's operating income every month. Whatever is left after debt service is the cash flow that gets distributed to investors. If the debt is expensive, the cash flow shrinks. If the debt is too aggressive in leverage, the refinance risk increases. Finding the right balance is where financing skill shows up.
Bridge Loans: Short-Term Capital for Value-Add
When you buy a building that needs renovation, permanent lenders don't want to touch it. Fannie Mae isn't going to underwrite a building with 30 percent vacancy and deferred maintenance. Banks won't write long-term fixed-rate loans against income that doesn't exist yet. That's where bridge lending comes in.
A bridge loan is short-term financing — typically 12 to 36 months — designed to fund the acquisition and renovation of a property that isn't yet stabilized. Bridge loans are interest-only during the term, which preserves cash flow while you're spending money on construction and waiting for renovated units to lease up.
Typical bridge terms in today's market: 75 to 80 percent of the purchase price, with an additional holdback for renovation costs that gets funded in draws as the work is completed. Rates run 8 to 10 percent. Origination fees of 1 to 2 points. The terms are more expensive than permanent financing, but bridge lenders are underwriting the future value of the property, not just the current income.
The exit strategy on a bridge loan is always a refinance. You complete the renovation, lease the building at market rents, demonstrate stabilized income for three to six months, and then refinance into permanent debt at a lower rate, longer term, and often with lower leverage. The bridge loan gets paid off, and the spread between the original loan balance and the new permanent loan — driven by the property's increased value — is where operator-created equity shows up on the balance sheet.
Agency Debt: The Gold Standard for Multifamily
For multifamily properties, the best permanent financing comes from Fannie Mae and Freddie Mac's small balance programs. These are the terms that make multifamily, as an asset class, fundamentally different from other commercial real estate sectors.
Agency debt features: fixed rates for 5, 7, or 10 years. Thirty-year amortization schedules. LTV up to 75 to 80 percent of appraised value. And the feature that matters most — non-recourse to the borrower, with standard carve-outs for fraud, environmental issues, and bankruptcy. Non-recourse means the lender's remedy, in the event of default, is limited to the property itself. They can't come after the borrower's other assets.
The government backstop — Fannie and Freddie are government-sponsored enterprises — is what makes these terms possible. It creates liquidity in the multifamily lending market that doesn't exist for other property types. This is one of the structural advantages of multifamily investing that doesn't get enough attention. All else equal, multifamily owners can access cheaper, longer-term, non-recourse debt than owners of industrial, retail, or office properties. Over a five- or ten-year hold, that advantage compounds significantly.
DSCR requirements on agency loans are typically 1.20x to 1.25x minimum. We underwrite to 1.40x or higher. We want margin — enough room that an unexpected expense, a slow leasing month, or a rent concession period doesn't put us in covenant violation. The operators who got into trouble in 2022 and 2023 were the ones underwriting to the minimum DSCR threshold with no cushion. When rates moved, their margin evaporated.
CMBS and Local Bank Lending: The Commercial Side
For industrial, retail, mixed-use, and other commercial property types, agency programs don't apply. The lending landscape is different — and generally less favorable, which is why multifamily carries a structural financing advantage.
Local and regional banks are the workhorses of small-balance commercial lending. They offer portfolio loans — meaning the bank holds the loan on its own balance sheet rather than selling it to a secondary market. Terms are typically 5- to 7-year fixed rates with 20- to 25-year amortization. LTV ranges from 65 to 75 percent. Most are recourse — the bank wants a personal guarantee. Relationship matters here. A bank that knows your track record, has seen your financial statements, and has worked with you on previous deals will offer better terms than one lending to you for the first time.
CMBS (conduit) loans are the permanent financing option for larger stabilized commercial properties. They offer non-recourse terms similar to agency debt but at a higher cost and with significantly less flexibility. CMBS loans are securitized and sold to bond investors, which means the servicing is rigid. Modifications, partial releases, and early payoffs are difficult or impossible without significant penalties. We use CMBS when the non-recourse feature matters and the property is truly stabilized with a long hold horizon. For value-add assets or properties we might want to exit within five years, the rigidity of CMBS outweighs its benefits.
Credit union commercial programs occasionally offer competitive terms for smaller deals — particularly in markets where the credit union has a local presence and wants to build commercial exposure. We've found them useful for deals under $1.5 million where the relationship dynamic of a small lender provides faster execution than a larger institution.
Why We Avoid Floating-Rate Debt
The 2022 to 2024 rate cycle was an expensive lesson for the industry. Operators who bought at peak prices with floating-rate bridge debt — expecting to refinance at 3 percent — found themselves holding maturing loans at 7 percent with no viable refinance. Some of these deals were forced into capital calls, loan modifications, or distressed sales. Not because the properties were bad, but because the financing was wrong.
We don't need rates to come down for a deal to work. If a deal only pencils at 4% and we're living in a 6% world, it's not a deal — it's a speculation on the Federal Reserve. We underwrite to what's real.
Our approach: we either use fixed-rate debt or we factor the current rate environment into the deal math from day one. On bridge loans — which are inherently short-term — we stress-test the exit refinance at rates 100 basis points above today's market. If the deal still works at the stressed rate, we proceed. If it requires rate relief to generate acceptable returns, we walk away.
This doesn't mean we're inflexible. If rates drop and we can refinance at better terms, that's upside we didn't underwrite to. But we don't build our business plan around it. The difference is philosophical: returns should come from operations — buying well, renovating efficiently, managing professionally — not from interest rate bets.
The Refinance as the Strategy
In a value-add deal, the refinance is often the most important financial event of the entire investment. Here's why.
You acquire a property for $2.5 million with a $1.75 million bridge loan. You invest $300,000 in renovations. After 18 to 24 months, the property is stabilized — occupancy is above 90 percent, rents are at market, and the NOI has increased from $150,000 to $220,000. Based on the new NOI, the property appraises at $3.3 million (at a 6.7% cap rate).
You refinance into a permanent loan at 75 percent of the appraised value: $2.475 million. That new loan pays off the $1.75 million bridge loan and returns approximately $725,000 back to investors. On a deal where total equity invested was $1.15 million, you've just returned more than 60 percent of investor capital — and you still own the building. The remaining equity continues to earn cash flow from the stabilized property, and the eventual sale returns the rest.
This is why conservative leverage at acquisition matters. If you over-leverage to buy — stretching to 80 percent LTV on the bridge — the refinance math has to be perfect. Every dollar of excess leverage at acquisition is a dollar less margin on the refinance. We'd rather have more equity cushion going in and execute a clean refinance that returns capital predictably.
What to Ask About Financing
If you're evaluating a deal or a sponsor, the financing questions are among the most revealing. The answers tell you how the operator thinks about risk — which matters far more than how they think about upside.
What type of debt? Bridge, bank, agency, CMBS? Each has a different risk and flexibility profile.
Fixed or floating? Floating rate is cheaper on day one but carries repricing risk that can be severe.
What's the DSCR at current rates? Not at projected rates. Not at refinance rates. At today's rates, on today's income.
What's the refinance plan? When does the bridge loan mature? What are the qualifying criteria for permanent financing? What happens if the property isn't stabilized by the maturity date?
What if rates don't come down? This one question separates the operators who underwrite conservatively from the ones who are betting on macro. If the answer starts with "we expect rates to…" — proceed with caution.