Exploring Creative Capital Solutions for Multifamily Properties

John Petersen, vice president and mortgage banker at KeyBank, offered insights into the current multifamily capital climate and opportunities to build out the capital stack during the Creative Multifamily Financing Solutions panel at the recent Bisnow Multifamily Annual Conference West.

Advancing the capital stack

Capital professionals are developing innovative solutions to advance the capital stack on mutifamily deals. Today, a typical permanent financing deal, for example, would include an agency bridge loan with preferred equity. This moves the deal up higher in the capital stack.

Petersen had a 1031 exchange deal in California’s Inland Empire that used this very capital structure. The borrower needed $150 million in debt and had $55 million in equity to put into the deal. Although Petersen noted that it was a “tricky” deal to put together, he said it is becoming a “textbook example of what you are seeing across the industry today.”

In addition, KeyBank has increased lines of credit for clients as another financing alternative. Typically, that route is for larger sponsors, where the financing is not required but rather a preference. “Often, it makes more sense if you’re getting a line of credit from a bank at 200 or 300 over the Secured Overnight Financing Rate (SOFR),” said Petersen. “It’s probably the most compelling financing out there. It’s beating mezzanine; it’s beating preferred equity.” A few years ago, expanding the line of credit was not a financing option, but in today’s environment, it is becoming a more common solution for borrowers to meet financing needs.

Reinvesting in relationships

Sponsors that have close relationships with their banks or other capital providers are going to have the opportunity to be more active. Particularly in challenging capital environments, like the one we are in now, relationships make a difference and can truly help close the deal, Petersen added. An existing relationship can include deposits with the bank, permanent financing, or agency financing deals. Sponsors leveraging an existing relationship are more likely to have access to creative financing solutions that align with their broader business objectives. Banks continue to be discerning in their lending activity, and are reserving their lending dollars for existing relationships. “At Key, we are always open to exploring creative financing solutions for new clients interested in a broad relationship that serves both parties well,” Petersen said.

Relationships are important for all types of sponsors, but Petersen noted that developers stand to benefit the most. In the current lending environment, construction lending opportunities are extremely limited, but with an existing relationship, developers can find the financing they need. “You can get construction financing. It is a total relationship exploration,” said Petersen, adding that while the bank isn’t leading with construction financing, it is available for the right sponsor. “It is available, but it is very limited.”

Navigating high interest rates

“Extend and pretend” has been the industry’s catchphrase of the moment, and lenders are extending the maturity of loans to accommodate borrowers. Meanwhile, sponsors have chosen to postpone and delay refinancing while waiting for interest rates to stabilize or decrease. Mortgage rates haven’t yet fallen significantly; therefore loan modifications have become more common. The Federal Open Market Committee (FOMC) has decreased interest rates three times this year, with high expectations for several additional cuts this year. “Lenders have been very accommodating,” said Petersen.

Unfortunately, as the federal funds rate has decreased, the 10-year Treasury has trended in the opposite direction. Peterson predicted that interest rate cuts will slow next year. “Fundamentally, if interest rates stay high, that’s a challenge for people, especially those who bought in 2021–22,” Petersen said. Interest rates directly impact borrowing activity. As interest rates began to fall in the third quarter of 2024, multifamily mortgage loan originations increased 59%,¹ according to research from the Mortgage Bankers Association. However, the industry group noted that the increase in long-term rates would slow momentum.

Interest rates are a key factor in whether a deal will work. When the five-year Treasury was below 3.50%, Petersen said he had dozens of inquiries a day. However, when the five-year Treasury went up to 4%, the inquiries slowed down significantly.

“I think in 2025, it is going to come down to interest rates. It is a math equation,” Petersen said. In addition, borrowers should shop around for the best deal possible, because every bank is going to be able to offer a different financing solution or get creative with a deal. For example, some Commercial Mortgage-Backed Securities (CMBS) are proving to be a highly successful route for multifamily. In fact, during the third-quarter surge, multifamily CMBS securitization was up 75%² for non-agency deals and 38% for agency deals. “For multifamily, this is sometimes a good route,”  Petersen said. “We’ve seen CMBS actually beat out agency on some deals.”

Petersen also noted that insurance costs are coming down, and that will also help offset the higher cost of capital. “I think that will move the needle,” he added.

Getting creative to finance deals

Capital markets experts are getting creative and innovative to finance even the most challenging deals. Ultimately, creative financing solutions come down to the capital team. An experienced bank can dig into a deal and find the right path forward. As Petersen said, “We are here to help. We are offering creative financing solutions, and I am happy to have the discussion.”

Connect with Us

To discuss the current market environment and what financing options are best for your next project, connect with John Petersen, or reach out to your KeyBank mortgage banker directly.

Learn More

Visit www.key.com/rec where you can find our expertise in multifamily, affordable, and more.