We have never used a bridge loan. Every acquisition carries fixed-rate, non-recourse financing at 70-75% LTV with a minimum five-year term - agency preferred, no floating rate, no rate caps. That rule did not feel remarkable for most of our history. It felt obvious in 2022 and 2023, when sponsors running floating-rate bridge debt on thin equity found themselves with reset debt costs, stalled renovations, and no viable exit. The 70-75% rule is not complicated. It is just the discipline that kept our capital structure from becoming the problem.
Key Takeaways
- 70-75% LTV is a ceiling, not a target. When lenders offer 80%, we decline. The equity cushion is the first line of defense against a market that moves against the deal. Overleverage at acquisition is not recoverable without a sale or a capital call.
- Fixed rate for the full term. Not fixed for two years with a rate cap. Fixed for the life of the loan - five years, seven years, ten years. The rate that is locked at closing is the rate for the hold. No resets, no cap purchases, no exposure to where rates go after closing.
- Agency is preferred because it is the most conservative structure available. Fannie Mae and Freddie Mac loans are non-recourse, fully fixed, and carry terms long enough to outlast a down market. Our last several acquisitions have been Fannie or Freddie Small Balance.
- Bridge debt creates optionality that looks like flexibility and acts like risk. It works when the renovation finishes on schedule and the refinance market cooperates. It does not work when either of those things fails to happen. 2022-23 demonstrated what that looks like at scale.
- 6% year-one cash-on-cash is required regardless of deal type. The debt structure has to leave enough room for the property to generate current income from day one. A deal that only pencils with the renovation complete and rents moved is not a day-one deal.
Dave Lamattina has financed 26 syndications without ever using a bridge loan or floating-rate debt. For context on how the debt rule fits into the broader underwriting framework, see how to underwrite a multifamily deal. For the staying power philosophy behind it, read Staying Power.
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Why 70-75%, Not More
The straightforward fact: equity cushion is downside protection. A property acquired at 75% LTV can absorb a meaningful decline in value before the equity position is impaired. A property at 85% LTV has far less flexibility.
Some lenders will go to 80%. We cap it at 75% regardless. The additional leverage would compress the equity required from LPs and marginally improve the projected IRR in the model. It would also reduce the buffer between asset value and debt balance. That trade is not worth making.
Our floor is around 65%. Below that, the returns start to compress - there is only so much equity in the deal, and too little leverage means the remaining LP capital is not working as hard as it should. The 70-75% range is the zone where current cash flow supports debt service comfortably and the equity cushion is large enough to survive a down market without requiring a sale.
What Bridge Debt Actually Does
Bridge debt is designed for a specific scenario: a property that cannot qualify for permanent financing at acquisition because the occupancy, the income, or the physical condition does not meet agency standards, but that will qualify after the renovation program is complete. The bridge loan carries the property through that period at a higher rate, with the expectation that a refinance into permanent financing replaces it at stabilization.
That model works when three things happen in sequence: the renovation completes on schedule, rents move to pro forma, and the refinance market is open at a rate that makes the permanent loan viable. All three have to work.
When rates reset in 2022, the permanent loan that sponsors had modeled at 4% cost 7%. The refinance that was supposed to lower the debt service instead increased it. Properties that had not yet stabilized - renovation programs still in progress, rent rolls not yet at pro forma - could not qualify for permanent financing at any rate. Rate caps that had been purchased as protection expired and had to be renewed at dramatically higher cost. Some sponsors could not make the numbers work and faced capital calls. Some sold at distress. We had none of those conversations, because none of our deals had that structure.
The Rate Cap Problem
A rate cap is a financial instrument that limits the maximum interest rate on a floating-rate loan. Sponsors using bridge debt routinely purchase rate caps as protection - if the rate goes above the cap, the instrument pays the difference. In a stable rate environment, rate caps are cheap. After the 2022 rate spike, rate cap premiums went through the roof.
Sponsors whose bridge loans were coming due faced a choice: refinance at much higher permanent rates, extend the bridge and purchase a new rate cap at sharply elevated cost, or sell. None of those options were available at the economics they had modeled. The rate cap was supposed to be cheap insurance. It became an unexpected and significant operating cost at exactly the wrong moment.
Fixed-rate debt has no rate cap because it needs no rate cap. The rate is fixed. It does not move with the market. The certainty is built into the structure from day one.
Cash Flow From Day One
The debt rule has a direct consequence for cash flow: the debt service has to be coverable from current in-place income, not from projected income after the renovation is complete.
We target 6% cash-on-cash in year one across all deal types. On a value-add deal with a heavy renovation program, that means the going-in rents - before any unit has been touched - have to support the debt service and operating expenses and still produce a 6% cash return on the equity invested. That is a meaningful constraint. It rules out deals where the business plan only works after the renovation is done.
A property that produces negative or near-zero cash flow in year one while the renovation is in progress is not generating returns for the LP - it is consuming capital. If the renovation runs long or costs more than budgeted, the LP capital consumption extends. Fixed-rate debt with a long term means there is no maturity cliff forcing a decision. But the cash flow discipline means we are not acquiring properties that require the LP to wait two or three years before distributions begin.
Over a five-year hold, the target range is 6-8% average cash-on-cash. The year-one floor keeps the entry discipline honest.
How This Shows Up in Specific Deals
The Elora acquisition - a 2009-built 104-unit property, our largest deal at over $30 million - carries a seven-year fixed Fannie Mae loan. Seven years of rate certainty on a core-plus asset with immediate cash flow. The renovation scope is lighter than a 1970s value-add, the income is stable from day one, and the debt structure gives us the flexibility to hold well past the initial underwrite if conditions warrant.
River's Edge, the 164-unit Haverhill property that was our first large syndicated deal in 2016, was financed with seven-year Fannie Mae debt. When an offer came in at year three that justified a $1.5 million yield maintenance penalty, the deal still returned 32% net IRR. The fixed-rate structure did not prevent the early exit - it just required the exit price to be high enough to absorb the prepayment cost. That is the right constraint.
The yield maintenance penalty is the cost of fixed-rate flexibility. A lender who has committed to a fixed rate for seven years has given up the ability to redeploy that capital at higher rates if the market moves. The yield maintenance compensates them for that. On a deal where the exit price is compelling enough to absorb the penalty and still produce a strong return, it is the right trade. On a deal where the exit is marginal, the yield maintenance acts as a natural brake on premature sales.
Frequently Asked Questions
Why not use bridge debt on deals that clearly need heavy renovation?
The renovation need is not the issue. A property that needs heavy renovation can be acquired with permanent fixed-rate financing if the going-in income covers the debt service at a reasonable LTV. The renovation is funded from reserves, renovation escrows, or LP equity - not from a short-term loan that assumes the renovation will be finished before the loan matures. Bridge debt is faster and sometimes cheaper in the short term. It introduces maturity risk and rate risk that permanent financing does not. We have renovated properties extensively - the Worcester brick buildings, Appleton Square, multiple Merrimack Valley assets - without using bridge structures.
Does fixed-rate agency debt limit what deals are available?
It rules out deals that only work with bridge financing - typically properties in such poor condition that they cannot qualify for agency underwriting at acquisition. We have bought properties in very poor condition and still used permanent financing, because the going-in income, even at depressed rents, was sufficient to service the debt. The discipline also means occasionally losing deals to sponsors willing to use more aggressive structures. That is not a problem. The deals lost to bridge-financed buyers in 2019-2021 became the distressed situations of 2022-23.
What is the interest-only period and how does it work?
Agency loans typically include an interest-only period at the front of the term - on our recent deals, around three years. During that period, the monthly payment covers only interest, not principal amortization. That structure improves year-one cash flow and provides additional cushion during the renovation period when capital is being deployed into units. After the interest-only period expires, the loan amortizes normally. The IO period is a feature of agency debt, not a workaround for cash flow problems.
What happens when a fixed-rate loan matures?
At maturity, the loan is refinanced at current market rates. That is a real risk - if rates are materially higher at maturity than at origination, the refinancing will increase debt service and compress cash flow. The 70-75% LTV and the conservative underwriting assumptions are the protection against that scenario: lower leverage means the refinanced debt balance is smaller, and a deal that was underwritten at conservative assumptions has more room to absorb a higher rate than one that was underwritten aggressively. The five-year minimum term ensures the hold period covers at least one full operating cycle before the refinancing question arises.
David Lamattina
President & CEO
About Dave Lamattina
Dave Lamattina is the founder and CEO of Arrowpoint Properties, a vertically integrated multifamily owner-operator based in Lawrence, Massachusetts. He has been acquiring and operating multifamily assets in the Merrimack Valley for over 22 years, with 1,100+ units acquired and exited and a current portfolio of approximately 850 units valued at around $230 million. Arrowpoint has completed 26 syndications with an average net IRR of 32% and a 2.50x equity multiple.
