Proprietary Preferred Equity Aids Multifamily Borrowers Amid Rate Hikes

Multifamily capital stacks are adapting to a market characterized by elevated interest rates and restricted loan proceeds, presenting acquisition and refinancing challenges for investors. A notable solution emerging is proprietary preferred equity structured behind Freddie Mac conventional loans. This financial instrument is gaining traction as investors seek more adaptable and efficient capital structures.

Jean-Laurent Pouliot, managing director and senior production officer at Arbor Realty Trust, explained that preferred equity functions as a layer between senior mortgage financing and common equity. This structure provides sponsors with access to supplementary capital without relinquishing significant control over an asset or committing to rigid financing terms. Investors primarily utilize preferred equity for its inherent flexibility.

While preferred equity increases leverage, borrowers often employ it strategically to maintain liquidity, decrease the required common equity contribution, and facilitate the execution of their business plans. Funds from preferred equity can be allocated towards capital expenditures, value-add initiatives, lease-up strategies, or recapitalizations, all while preserving the ownership economics of the common equity holders. The demand for this product has seen a marked increase due to persistently high interest rates and loan proceeds that frequently fall short of borrower expectations.

Furthermore, a significant number of loans originated during the period of lower interest rates are now approaching their maturity dates, adding another layer of complexity to the refinancing landscape. The integration of preferred equity with Freddie Mac financing, facilitated through a single lender, offers distinct advantages. Pouliot anticipates that flexible capital solutions will continue to play an increasingly critical role in the multifamily finance sector.