Capital Preservation as a Strategy, Not a Constraint

Capital preservation is often framed as the cautious choice—the path taken by investors who lack conviction or tolerance for volatility. This is backwards. Preservation is not about avoiding risk. It is about understanding which risks are compensated and which are not.

In real estate, permanent capital loss occurs when sponsors underwrite to assumptions they cannot control: speculative rent growth, compressed exit cap rates, or perpetually low interest rates. These are not risks. They are hopes dressed up as projections.

A preservation-first strategy begins with a simple question: what has to go right for this deal to work? If the answer includes multiple external tailwinds, the deal is not investable. If the answer is "execute the business plan and hold to maturity," the deal has a foundation.

Risk in real estate is not evenly distributed. It concentrates in four places: leverage, refinancing exposure, exit cap rate assumptions, and operational complexity. Most sponsors focus on the upside levers—rent growth, occupancy, and expense reduction. Few stress-test the downside scenarios with the same rigor.

Leverage is the most obvious and most frequently mismanaged. A 75% LTV deal can be a home run in a rising market and a catastrophic loss in a downturn. The difference is not the asset. It is the capital structure and the sponsor's ability to survive volatility without a forced sale.

Refinancing risk is subtler. Bridge loans and short-term agency debt create binary outcomes: if the market cooperates, you refinance and extend. If it doesn't, you sell into weakness or negotiate extensions at punitive rates. This is not risk management. It is market timing disguised as a business plan.

• Leverage: Conservative LTV preserves optionality and avoids forced sales
• Refinancing: Longer-term fixed debt eliminates binary exit windows
• Exit cap rates: Underwrite to normalized or expanded caps, not compression
• Operations: Avoid complex value-add stories without clear execution track record

Our underwriting framework is designed to eliminate hope-based assumptions. We model three scenarios: base, stress, and severe stress. The base case assumes flat or modest rent growth, stable expenses, and an exit cap rate equal to or higher than the entry cap. If the base case does not meet our return threshold, we pass.

The stress case assumes a recession during the hold period: rent growth turns negative, expenses rise, and exit cap rates expand by 50–100 basis points. If the stress case results in permanent capital loss, we pass. The severe stress case assumes a refinancing freeze or a forced sale at an inopportune time. If we cannot survive severe stress with equity intact, the deal is not structured correctly.

This is not conservative underwriting. It is realistic underwriting. Markets cycle. Lenders tighten. Sponsors face redemptions or liquidity constraints. Deals that pencil only in the base case are not deals. They are gambles.

Structure determines behavior. A deal with a 10% sponsor promote and no GP equity creates misaligned incentives. The sponsor has no downside exposure and significant upside leverage. This works only if the sponsor has reputation capital they cannot afford to lose. Most do not.

We require meaningful sponsor co-investment—typically 10–20% of the equity, pari passu with LPs. We also structure preferred returns and return hurdles that prioritize capital return before promotes kick in. This is not punitive. It is alignment.

Downside protection is not just about structure. It is about who you back. Sponsors who have navigated a full cycle, who have returned capital in difficult environments, and who have a track record of conservative leverage are rare. When we find them, we build long-term relationships. When we don't, we wait.

We are focused on core-plus and value-add multifamily with conservative leverage, realistic rent growth assumptions, and sponsors who have managed through adversity. We are avoiding bridge debt, short-term floating-rate exposure, and deals that require a liquidity event in the next 24 months.

We are not chasing yield. We are not underwriting to best-case scenarios. We are not investing with sponsors who have never faced a down cycle. We are building a portfolio designed to compound through 2026, 2027, and beyond—regardless of what the Fed does, what cap rates do, or whether we enter a recession.

This is not a call to avoid risk. It is a call to be compensated for the risks we take, to structure around the risks we cannot control, and to build a portfolio that does not require perfect market timing to succeed. That is what preservation-first investing looks like in practice.