Acquisition Financing Strategy and Execution

Different acquisition strategies call for different financing approaches. Core/cash flow strategy: agency lending (Fannie Mae, Freddie Mac) for 5+ unit multifamily offers the best terms—fixed rates, 30-year amortization, non-recourse, and 75-80% LTV. Life insurance companies offer similar terms for larger deals ($5M+). Value-add strategy: bridge lending provides higher leverage (75-80% of purchase + renovation) with short terms (2-3 years) and flexible prepayment, enabling the renovation and stabilization before refinancing into permanent debt. Distressed acquisitions: hard money or private lending provides speed and flexibility for off-market deals, with higher rates (10-15%) but no income verification or property condition requirements. Portfolio strategy: portfolio lenders (regional banks) offer flexible terms across multiple properties with relationship pricing. CMBS lending: conduit loans offer non-recourse, fixed-rate terms for larger stabilized properties but with rigid structures and limited flexibility.

The loan process for a typical commercial acquisition takes 30-60 days. Pre-qualification (before offer): engage your lender with property details and receive a preliminary term indication. This informs your offer price and feasibility assessment. Application (Day 1-5): submit the complete loan package—property financials, borrower financial statement, and property information. Underwriting (Day 5-21): the lender underwrites the loan—analyzing the property financials, ordering an appraisal, and reviewing the borrower's qualifications. Term sheet/commitment (Day 14-30): the lender issues a term sheet followed by a formal commitment letter. Review the commitment against the preliminary terms and negotiate any changes. Closing preparation (Day 30-45): loan documents are prepared, the title company confirms insurance and title requirements, and closing is scheduled. Funding (closing day): the lender funds the loan and the deed and mortgage are recorded.

The capital stack (combination of equity and debt sources) should be optimized for return, risk, and flexibility. Senior debt (first mortgage): 65-75% of the capital stack, lowest cost of capital. Mezzanine debt (subordinate loan): 10-15% of the capital stack, higher rate than senior debt but lower cost than equity. Used to reduce equity requirement. Preferred equity: provides a fixed return to the preferred equity holder before the common equity participates. Useful for syndications. Common equity: the investor's own capital plus any LP equity. The highest-cost capital because it bears the most risk but captures all upside. The optimal capital stack balances: leverage (higher leverage increases returns but also increases risk), cost of capital (each layer has a different rate—minimize blended cost), flexibility (avoid structures that prevent refinancing, prepayment, or property improvements), and control (debt covenants and preferred equity terms may restrict operational decisions).