Dissecting the Multifamily Capital Stack

The breakdown for the commercial real estate capital stack (including multifamily deals) involves securing debt and equity sources to finance a given transaction. The simplest form of this transaction involves an outright purchase of all interests by a single investor. In the case of most commercial real estate deals though, the capital stack is structured with many players with different risk/return profiles.

The whole structure boils down to two major categories: Debt and Equity. Within each group, there are many facets that determine what combination of this capital will work best for a given deal.

Senior Debt Options

The first step to determining the right senior debt is determining the business plan for the deal. Some common questions to ask are:

  • How long will the investment be held?
  • How will a re-positioning or value-add affect cash flows of the property in the short and long run?
  • How much risk (in terms of leverage) makes sense for the given transaction?
  • How flexible does the lender need to be in order to make the deal work?
  • How much time do you have to close?

Of course, these are only a few questions that should be asked, but the most important part of the debt financing is that it accomplishes the business goals without incurring substantial penalties or risks to do so.

The Players

In terms of multifamily debt markets, there are three key players in the field: Lenders, Seller Servicers, and Brokers. Each plays a part in facilitating the financing of the senior loan.

Preferred Equity

Lenders are the ultimate holder of the paper that will be used to secure the senior loan. It is their balance sheet that is used to carry the risk of the individual loans.

Of course, many lenders syndicate all or a portion of their loan investment to the capital markets either in the form of senior/subordinate interest, grouped bond tranches, or single-class mortgage-backed securities as part of their investment platform. Though other lenders may carry the entire loan balance on their balance sheet.

What is important to note here is that debt platforms can offer terms upwards of 85% of the value of the property depending on the pricing and structure of the transaction.

Delegated Lenders

Delegated lenders, sometimes referred to as Seller Servicers, serve two major purposes in the multifamily agency debt space, they source and underwrite loans for the agencies, and they also provide different levels of servicing functions for the loans that they originate.

The three main agencies who function under this type of structure are listed below (including a link to approved Delegated Lenders):

Each program operates a little differently, but the key takeaway is that Delegated Lenders have access to these agency lender balance sheets.


Brokers have one very specific purpose. Their goal is to provide the connection between the borrower and the Lender and/or the Delegated Lender, which ultimately leads to a loan. Because of the myriad of choice in the multifamily space, a good broker has a network of Lenders and Delegated Lenders with programs to match the needs of a given deal. For this service, a broker is typically provided a fee with the closing of the transaction.

The Programs

For as many Lenders as there are in the multifamily space, there are also many different loan structures. For more vanilla financing, the agencies and, to a lesser extent, lower leverage balance sheets lenders are the major players in the space. One item to note with agency lenders is that they typically have much less flexibility than balance sheet lenders, mainly because the loans have stricter guidelines based on government requirements and also due to Freddie Mac and Fannie Mae selling their loans as MBS.

Here are some of the multifamily programs that each of the agencies currently offer:

Other Lenders offer different programs and are typically more flexible in terms of what they can provide. One exception to this would be the CMBS market, though it has diminished in significance over time as the agencies have absorbed more of the overall market share.

Freddie Mac and Fannie Mae are primarily stabilized property lenders. When a property is being re-positioned or is a ground up construction deal, the field for Lenders opens up quite a bit. Typically, these loans are shorter term in nature and are financed with HUD, bridge lenders, banks, and other participants that are typically looking to take on a bit more risk for a higher return.

The key takeaway here is that there are many options for borrowers when looking for the proper loan. The key is again to understand the business plan for the property and match it to a structure and lender who best fit for its optimal execution.

Equity Options

When it comes to equity options, the sky is the limit. As noted earlier, in its simplest form, an investor would  secure a loan from a lender (or in some cases, not) and then provide the remaining capital required for the investment.

In most cases though, the investor is looking for a way to raise capital from outside sources in order to finance the remaining required equity for a project. There are many ways to achieve this.

Syndicated Equity

Syndicated equity is the most basic form of an equity capital raise. It typically involves raising equity by selling high net worth individuals or entities a limited partner interest a company. The company will then purchase the underlying real estate. The benefits of this structure are that it typically gives the investor (or sponsor) the most control over the deal as well as a better return for the sponsor because the syndicated interests are typically in smaller chunks and not as well positioned as a larger institutional investor.

Some of the drawbacks of this structure are that it requires a fairly well capitalized and engaged base of limited partner investors to maintain equity capital flow and also requires reporting to a broader base of investors, which requires meeting the specific needs of each of the investors in the broader pool.

This structure usually entails the sponsor receiving some sort of a Preferred Return in the deal, which is usually paid out when the deal achieves an overall minimum return.

Joint Venture Equity

Joint venture equity is similar to Syndicated Equity in the sense that the sponsor syndicates a portion of its investment to the Joint Venture (JV) Investor in order to fund required equity. The major difference to syndication is that the JV Investor is typically a single entity, requiring a higher degree of control and reporting when investing in a deal.

Additionally, the single JV Investor can typically negotiate a far better deal for itself than a syndicated equity interest because of its size relative to the total equity in a single transaction.

Preferred Equity / Mezzanine Debt

Preferred Equity and Mezzanine Debt are two structures attempting to achieve a similar result, which is to essentially carve out a senior position in the total equity. The organizational structure are slightly different, but the economics tend to be fairly similar.

Preferred Equity

Preferred Equity is typically structured as a member or partner in the company owning the real estate. This position has a preferred interest and typically receives a portion of cash flow, which is senior to the remaining equity, along with receiving its capital and a preferred return ahead of the remaining equity at a capital event. 

The return treatment should not be confused with a basic Preferred Return, as noted earlier.

One additional nuance to preferred equity is that it can be structured as Hard or Soft Preferred Equity, though it is a bit beyond the cope of this article.

Mezzanine Debt

Mezzanine Debt is typically structured as a loan whose pledged collateral is the total interests in the equity position. In essence, the mezzanine loan is a corporate loan whose collateral is the company owning the underlying real estate. Similar to the Preferred Equity structure, this position typically receives a portion of cash flow, which is senior to the remaining equity, along with receiving its capital and a preferred return ahead of the remaining equity at a capital event. 

In today’s multifamily environment, most lenders prefer to see the Preferred Equity structure as opposed to the Mezzanine Debt structure.

Partial Preferred Equity

Partial Preferred Equity is a structure, which is similar to Preferred Equity with one small adjustment. In this form of equity, only a portion of the remaining equity is subordinate to the Preferred Equity.

An example of this would be an equity structure that looks something like this:

JV Investor
Sub Investor
Pref Investor


In this case, the JV Investor is not subordinate to the Pref Investor. Only the Sub Investor is subject to the economics from the Pref Investor. The benefit of this structure is that it allows for two different equity investors to enter the stack with two different risk/return profiles. 

There may be a case where a JV Investor would like to put in additional equity into the deal or would not like to be subordinate to the Pref Investor, whereas the Sub Investor would prefer to put in less equity in addition to opening up the ability to achieve higher returns. 

Selecting a Capital Stack

At the end of the day, the common theme is that a capital stack is structured based on the business plan for the property. There are many options to achieve the correct mix of debt and equity, which makes determining the capital stack an important part of the overall real estate transaction.