Capital Spotlight – Highlighting featured capital investors. We regularly publish the detailed criteria of our most unique real estate capital sources.
Over the past 18–24 months, sponsors have navigated a market where raising debt and equity was challenging. On the debt side, that dynamic has shifted meaningfully. An abundance of private senior debt has entered the market, and because so many groups are using similar sizing metrics, pricing has come down as lenders try to differentiate themselves. That increased competition has been a welcome development for sponsors on the debt side, but it has also reduced the relevance of many preferred equity and mezzanine debt facilities. Many sub-debt providers are sizing to the same last-dollar leverage as a private senior loan on its own, which limits the incremental value of layering a sub-debt piece into the capital stack. The result is a market where debt is readily available, but sponsors are still facing the same challenge they were 18 months ago when it comes to raising equity, and with fewer tools in the sub-debt market that meaningfully help bridge that gap.
Valencia Realty Capital recently connected with a family office that we believe is well positioned to address this dynamic. This group has a long history of investing in commercial real estate as LP equity and, in recent years, has shifted its focus to directly originating preferred equity. Their goal is straightforward: structure high-leverage pref equity, targeting 80–85% of total capitalization, to ease the equity raise burden that sponsors are facing in today’s market. While Valencia regularly speaks with pref equity providers willing to lend to similar leverage levels, many of those groups are constrained by rigid underwriting metrics that, in practice, prevent them from getting to the leverage they advertise. This family office’s flexible capital structure and experienced investment background allow them to size beyond much of their sub-debt peer group, particularly on deals where value creation has not yet been fully realized.
What makes this group particularly compelling is their structure and approach. As a family office with a lean team and no formal board approval process, they can evaluate situational complexity that larger institutional pref groups typically will not engage with. Their focus is value-add multifamily (1990s vintage and newer) and BTR, including selective ground-up development, with check sizes in the $10MM–$20MM range. They are comfortable with limited or no in-place cash flow, welcome opportunities in lease-up or shortly after construction completion and can move quickly when a deal has moving pieces that require a more dynamic capital partner.
Product Overview
The key differentiator in this preferred equity product is the capital source’s underwriting approach. Where most pref groups size their proceeds to an untrended, stabilized debt yield in the 7%–8% range, this group underwrites to a trended debt yield, typically targeting the high-6% to low-7% range. In practice, this means they can get meaningfully more competitive on leverage for deals where the value creation story is real but the current numbers do not yet reflect it. They are also generally flexible on their target debt yield subject to market strength, business plan specifics, and sponsor track record.
Pricing falls in the 14%–16% range depending on leverage and market, with a 6%–8% current pay requirement. Interest reserves are funded at closing if there is not sufficient cash flow in place to cover the current pay. They are ultimately looking for experienced sponsorship groups with a demonstrated track record, and a well underwritten business plan in need of additional equity for their deal.
Key Preferred Equity Terms (Indicative)
| Term | Details |
| Typical Deal Size | $10MM – $20MM (flexible on both ends) |
| Sizing | 80–85% LTC / LTV |
| Pricing | 14%–16%; Current Pay 6%–8% |
| Term | 3 years + two 1-year extensions (3+1+1) |
| Lender Fees | 100 bps origination; 100 bps exit |
Targeted Deal Types & Underwriting Criteria
| Criteria | Details |
| Asset Types | Multifamily (1990s+ vintage) and BTR; ground-floor retail acceptable; approximately half of current portfolio is BTR |
| Geography | Primary and secondary markets nationwide; suburban locations up to one hour outside of these markets also considered |
| Sizing Metric | Trended debt yield-driven, typically sizing to 80–85% LTC |
| Sponsor Profile | Local developer-operators with a demonstrated track record |
| Senior Debt Requirements | Agency, life companies, banks, and credit funds accepted; CMBS not permitted |
Common Scenarios
This group tends to be most competitive on deals where value creation has not yet been realized. Below are several scenarios we see regularly where this capital source has been a strong fit.
Value-Add Multifamily Acquisition with Moderate Rent Growth. A straightforward acquisition with a modest renovation or management turnaround plan and 10–30% projected rent growth. The business plan does not involve a heavy lift, which means limited near-term NOI growth relative to the current basis. Traditional pref equity groups often size too conservatively for this risk profile, leaving the sponsor short on proceeds. This group’s underwriting approach allows them to size more competitively on deals where the upside is real but the trailing numbers do not yet support it.
Lease-Up or Acquisition of Newly Developed Assets. A sponsor completes construction or acquires a recently built asset from a distressed or motivated seller. The property is not yet stabilized, with limited occupancy history and no trailing financials. Traditional pref groups sizing to a 7%–8% untrended debt yield often cannot get more competitive than a private senior bridge loan on its own, limiting the practical value of layering a sub-debt piece into the stack. This group’s willingness to underwrite to trended metrics allows them to size off projected stabilization and keep the capital stack intact during the lease-up period.
HOA Conversion or Documentation Complexity. A sponsor is navigating HOA dissolution, condo-to-rental conversion, or other documentation issues that block a clean agency takeout. Larger pref groups typically will not engage with these situations. This group’s small team can evaluate the situational complexity and bridge the sponsor to permanent financing once the issues are resolved.
BTR Development Nearing Completion. A construction loan is maturing on a BTR project approaching certificate of occupancy. Traditional pref groups are hesitant to take on development exposure. This group actively targets BTR development preferred equity and can step in where others will not.
Execution Timeline
This group operates with a small investment committee and no formal board approval process. Initial feedback is typically provided within one to three business days of receiving a new opportunity. From term sheet to close, execution can be accomplished in approximately 60 days, with the potential to move faster depending on deal complexity.
Next Steps
If you are working on a multifamily or BTR project where traditional preferred equity groups are not sizing competitively enough to make the capital stack work, whether due to a lease-up, a light value-add business plan, development exposure, or situational complexity, we would welcome the opportunity to evaluate whether this capital source is a fit. Reach out to Valencia Realty Capital and we can provide a preliminary outline of terms quickly.
If this capital source may be of interest, book a call to discuss a potential capital arrangement.
Read our last Capital Spotlight: “90% LTC Debt Fund Capital Targeting Horizontal Lot Developments”