What Makes a Deal Investable

Leverage is the most direct expression of risk tolerance in real estate investing. Every lender sets limits. Every sponsor chooses a capital structure. The question is not whether to use leverage—it is how much leverage can be sustained through volatility without triggering a forced sale.

A deal financed at 75% LTV with floating-rate debt and a two-year maturity is not a leveraged investment. It is a refinancing gamble disguised as real estate. The asset may perform. The operations may execute. But if debt markets tighten at maturity, the sponsor is left negotiating extensions at punitive rates or selling into weakness.

We focus on leverage not as a way to amplify returns, but as a test of durability. Conservative LTV (typically 60–65%) paired with fixed-rate, long-term debt eliminates the binary outcome of a refinancing event. This is not about avoiding risk—it is about avoiding risks that do not pay us to take them.

The most critical underwriting question in 2025–2026 is not "what are the rents?" or "what is the exit cap rate?" It is: "when does the debt mature, and what happens if we cannot refinance on similar terms?"

Deals financed during the 2020–2022 window often carry 3–5 year bridge loans or short-term agency debt. Many of these loans are now maturing into a market where debt costs have doubled and lender appetite has contracted. Sponsors who underwrote to a seamless refinance are discovering that the refinance is neither seamless nor certain.

We avoid deals with near-term debt maturities unless there is a clear path to either (a) refinancing at higher rates without breaking equity returns or (b) selling without relying on cap rate compression. Most deals do not meet either test. As a result, we pass.

Exit cap rate assumptions reveal more about a sponsor's underwriting philosophy than any other variable. If a sponsor underwrites to an exit cap rate below the entry cap rate, they are betting on multiple expansion. If they underwrite to an exit cap at or above the entry cap, they are pricing in risk.

We do not underwrite to cap rate compression. Not because it is impossible—but because it is not controllable. Cap rates are a function of interest rates, risk appetite, and capital availability. None of these are under the sponsor's control. A deal that only works if cap rates compress is not a deal. It is a macro bet.

Our standard is simple: the exit cap rate assumption must be equal to or 25–50 basis points higher than the entry cap. This eliminates the need for perfect timing and allows us to focus on what we can control: operations, cash flow, and capital structure.

Value-add strategies create value by improving operations, upgrading units, or repositioning assets. But operational complexity introduces execution risk—and not all sponsors are equipped to manage it.

Deals that require significant capital expenditures, lease-up risk, or repositioning timelines are only investable if the sponsor has a demonstrated track record in that exact strategy and market. A sponsor who has successfully executed Class B value-add in secondary sunbelt markets may not be suited to reposition a workforce housing asset in an urban core. Experience is not transferable across strategies without evidence.

We prefer deals with limited execution dependency: stabilized occupancy, modest capex, and professional third-party property management. When we do invest in value-add, we require sponsors with multi-cycle experience and contingency reserves that can absorb delays or cost overruns. Most deals do not meet this bar.

Before capital is deployed, every opportunity is evaluated against five filters. A deal that fails any one of them is declined—regardless of the asset quality or projected returns.

• Leverage & Debt Structure: LTV ≤65%, fixed-rate debt with >3-year term to maturity
• Cash Flow Durability: Sustainable DSCR >1.4x under stressed rent growth and elevated expenses
• Exit Assumptions: Exit cap rate ≥ entry cap rate; no reliance on cap rate compression
• Operational Complexity: Proven sponsor track record in exact strategy and market, or simplified execution with limited capex
• Sponsor Alignment: Minimum 10% GP co-invest, pari passu with LP capital; clear track record of returning capital in adverse conditions

These are not guidelines. They are requirements. We do not make exceptions.