As interest rates remain elevated, real estate deal structures are undergoing a noticeable shift. Higher borrowing costs have pushed investors, developers, and lenders to rethink how they structure transactions. The days of easy leverage and low-cost capital are behind us—today’s environment requires more creativity, risk-sharing, and flexibility.
1. Shift from Debt-Heavy Structures to Equity-Rich Models
When rates were near zero, many deals relied heavily on debt, sometimes as high as 75-85% loan-to-value (LTV). But in a high-rate world, overleveraging is both risky and expensive. Now:
- Equity contributions are increasing.
- Lenders are more conservative, offering 55-65% LTV.
- Developers are bringing in more joint venture (JV) partners to spread risk.
This has led to more balanced capital stacks, where equity and preferred equity play a greater role in absorbing potential losses.
2. More Use of Preferred Equity and Mezzanine Financing
To fill financing gaps left by cautious senior lenders, investors are turning to preferred equity or mezzanine debt. These options come with higher returns (and higher risks), but they allow projects to move forward without relying solely on expensive senior debt.
- Preferred Equity: Often structured with fixed returns and downside protection.
- Mezzanine Debt: Sits between senior debt and equity, offering flexibility but requiring tighter covenants.
3. Sellers Offering Concessions and Creative Financing
Sellers understand buyers are grappling with tighter underwriting and financing hurdles. As a result, many are offering:
- Seller financing with interest-only periods.
- Purchase price reductions or delayed closings.
- Earn-outs tied to property performance.
These terms help buyers close deals without overextending capital upfront.
4. Shorter Loan Terms with Extension Options
Traditional 10-year fixed-rate loans are less common. Borrowers prefer:
- 3 to 5-year terms.
- Floating rates with interest rate caps.
- Built-in extension options to allow refinancing when rates (hopefully) drop.
This structure keeps options open while managing risk in a volatile market.
5. Institutional Co-Investments and Programmatic JVs
Large institutions are increasingly entering co-investment agreements or forming programmatic joint ventures with experienced operators. Why?
- Operators get access to capital with more flexible terms.
- Institutions reduce their risk by investing alongside on-the-ground experts.
- Both sides benefit from long-term value creation.
This model is especially useful in value-add or development projects where returns are tied to execution and asset repositioning.
6. Emphasis on Asset Management and NOI Growth
Investors are now laser-focused on growing Net Operating Income (NOI), since cap rate compression is no longer a given. As a result:
- Deal structures often include performance hurdles.
- Promote structures are more back-loaded, incentivizing long-term growth.
- Asset management teams are playing a bigger role post-acquisition.
7. Cap Rate Adjustments and Realistic Exit Assumptions
Buyers are no longer assuming cap rate compression will carry the deal. Now:
- Underwriting uses higher exit cap rates.
- IRR projections are more conservative.
- Return assumptions focus on cash flow, not just resale value.
This has changed how value is modeled and how risk is shared between sponsors and investors.
Final Thoughts
In a high-rate world, real estate deals demand more than capital—they require thoughtful structuring. Investors who adapt to the new reality with flexible, transparent, and conservative approaches will be better positioned to succeed. From more equity-heavy capital stacks to innovative financing tools, the landscape has evolved—but so has the opportunity for well-prepared sponsors and partners.