Mezzanine Financing Provides Higher Leverage and More Control

Senior debt, a foundational element of most multifamily property acquisitions and developments, rarely covers the full capital requirement. To bridge the gap between what senior lenders offer and what sponsors need, many borrowers pursue mezzanine financing, which provides greater leverage and more control.

Where Does Mezzanine Financing Sit in the Capital Stack?

Compared to senior loans that are secured by the property itself through a mortgage, mezzanine loans are typically secured by a pledge of ownership interests in the borrowing entity. This middle-ground positioning helps borrowers bridge the funding gap without diluting ownership or bringing in additional equity partners.

Mezzanine loans carry higher risk than senior debt, and investors typically require higher returns for this financing. Despite that dynamic, this type of subordinate debt is often more attractive than incurring equity costs when considering ownership dilution and profit-sharing requirements.

What Are the Key Strategic Benefits of Mezzanine Loans?

By structuring mezzanine products with interest-only payments or flexible amortization schedules, borrowers maintain a smaller cash-flow burden during critical initial phases such as lease-up or renovation periods. Beyond helping sponsors scale their portfolios or fund value-add improvements, mezzanine loans offer:

• Higher leverage: The most immediate benefit is access to additional capital without raising more equity, helping to maximize returns.
• Ownership preservation: By using debt rather than bringing in equity partners, sponsors retain more control over the asset and its business plan.
• Flexible terms: These loans are structured to be co-terminous with the senior debt, meaning both loans mature simultaneously. This alignment simplifies the repayment strategy and reduces refinancing complexity at maturity.

Common Reasons for Pursuing Mezzanine Loans

Deploying mezzanine debt can be a powerful lever for multifamily investors across different deal structures and shifting markets. Sponsors can build stronger, more efficient capital stacks when they understand the ideal use cases for this gap financing, such as:

• Acquisition and Construction: When conventional or Agency financing doesn’t provide the full required debt capacity, mezzanine fills the gap without requiring additional equity partners.
• Value-Add or Repositioning Properties: Lenders who understand a value-creation strategy can provide flexible capital.
• Recapitalizations or Refinancing: Sponsors facing significant equity calls may use mezzanine to avoid excessive ownership dilution.
• Bridge Financing Enhancement: When paired with bridge loans, mezzanine enables higher leverage or provides a longer runway for an asset to stabilize.

Market Cycles Where Mezzanine Loans Are Advantageous

While mezzanine solutions can add value in many market environments, certain conditions make them especially appealing for multifamily sponsors, including:

• Transitional or Value-Add Markets: Some metros may have a higher volume of properties requiring significant capital improvements or repositioning.
• High-Interest-Rate Environments: Higher-leverage capital can still deliver acceptable returns on equity despite elevated overall capital costs.
• Strong Rent Growth Markets: In robust rent growth markets with high NOI potential, sponsors can capitalize on future cash flow projections without waiting for refinancing opportunities.
• Stabilizing or Recovering Markets: Markets with high stabilization or recovery trends allow sponsors to act quickly and secure deals ahead of rising competition.

Arbor’s Mezzanine Financing Program Helps Borrowers Scale Faster

Arbor’s mezzanine program can be combined with new or existing senior loan financing and other products, including preferred equity and bridge loans, creating customized capital stacks tailored to each sponsor’s specific business plans.

Eligible properties include existing multifamily and new construction located in strong markets with positive demographic, population, and employment trends. Borrowers can choose between interest-only payments that minimize cash flow pressure during value-add execution or fixed principal paydowns that gradually reduce leverage as properties stabilize.

Partner with a Lender That Supports Your Entire Capital Stack

With more than 30 years of success in Agency lending, bridge financing, mezzanine debt, and preferred equity, Arbor delivers certainty and flexibility. Our mezzanine program helps sponsors maximize leverage, execute value-add strategies, or refinance for stronger capital structures.

Looking to elevate your next multifamily deal? Contact us to explore how Arbor’s solutions can power your growth.

Interested in the multifamily real estate investment market? Contact Arbor today to learn about our array of multifamily and single-family rental financing options and view our other market research and multifamily posts in our research section.