As capital markets tighten and commercial real estate (CRE) owners face rising interest rates, refinancing friction, and lender retrenchment, portfolio resilience increasingly depends on your ability to stay agile. At the heart of that agility is financing flexibility.
Flexible financing structures give CRE owners the tools to navigate market shocks, adapt capital strategies to evolving asset performance, and seize opportunities as they emerge. While fixed-rate, long-term debt traditionally provides stability, overly rigid capital structures can hinder responsiveness in today’s rapidly shifting market.
In this article, we explore how flexible financing not only supports current asset management needs but also positions your portfolio for long-term success across cycles.
Why Flexibility Matters in CRE Capital Strategy
CRE assets don’t operate in a vacuum. Their performance is directly impacted by changes in the interest rate environment, lender sentiment, tenant demand, and broader macroeconomic cycles. Financing structures that lock in inflexible terms (e.g., rigid covenants, hefty prepayment penalties, or short maturity windows that offer little time for refinancing—sometimes called “short fuses,” which can increase pressure on borrowers) may maximize proceeds in the short term, but they can create drag—or even default risk—in volatile conditions.
Strategic flexibility in financing offers several portfolio-level advantages:
- Capital mobility: Ability to reposition equity or refinance opportunistically
- Risk management: Tools to restructure debt as asset or market conditions change
- Transaction readiness: Greater optionality when exiting, selling, or recapitalizing
- Value enhancement: Opportunity to time refinances with favorable market conditions
Flexible debt structures empower owners to adapt their capital stack to the life cycle of the asset, not the other way around.
Structuring for Optionality: Common Flexible Financing Tools
Flexible financing isn’t one-size-fits-all. It’s a suite of tools that CRE borrowers can tailor to their portfolio goals and risk tolerance. Here are five foundational elements that support optionality:
1. Prepayment Flexibility
Step-down penalties, yield maintenance exceptions, and post-lockout open periods aren’t fully flexible but usually allow easier exits than fixed high penalties.
Example: A borrower with a five-year loan and a step-down prepayment schedule (5% to 1%) gains more exit agility over time. That said, some borrowers find a 5% penalty costly—sometimes more than yield maintenance—so flexibility depends on the loan and borrower’s needs.
2. Extension Options and Interest-Only Periods
Embedded extension options (often in 12-month increments) give borrowers time to stabilize an asset before refinancing.
Example: A transitional asset with a 3-year interest-only (I/O) term and two 1-year extensions provides breathing room for asset stabilization before amortization begins.
3. Tranche Structures and Mezzanine Flexibility
Rather than relying solely on senior debt, borrowers can optimize leverage with subordinate tranches like mezzanine or preferred equity.
Example: A borrower caps senior debt at 60% loan-to-value (LTV) to meet debt service coverage ratio (DSCR) covenants but layers in 15% mezzanine to reach target leverage, preserving future refinancing optionality.
4. Loan Assumption and Transfer Rights
Loans that allow for assumption or partial transfer can improve liquidity and marketability during disposition.
Example: In a rising rate environment, an assumable 3.5% loan can significantly enhance a property’s appeal compared to initiating new debt at 6.5%.
5. Flexible Covenant Packages
Loans with lighter covenant packages, performance-based triggers, or renegotiation levers help borrowers maintain control during volatility.
Example: A DSCR-based cash management trigger that only activates after two consecutive quarters below threshold gives borrowers room to manage through short-term disruptions.
Use Case: Flexible Financing in Action
In early 2024, a CRE sponsor with a portfolio of stabilized industrial properties faced a balloon maturity on a $60M senior loan. Rates had risen 250 bps since origination, and the refinancing environment was constrained. Fortunately, the original financing included:
- An extension option contingent on a 1.25x DSCR
- A flexible mezzanine tranche
- A prepayment step-down schedule
Using the extension option, the sponsor extended the loan term, secured a bridge-to-perm loan with a new lender, layered in preferred equity to preserve liquidity, and avoided costly yield maintenance penalties. This approach minimized disruption, preserved equity, and strengthened the long-term capital stack.
Explore real-world debt management use cases.
When to Prioritize Flexibility Over Maximum Proceeds
Borrowers often face a trade-off between loan proceeds and flexibility. Higher leverage loans typically come with tighter covenants, larger prepayment penalties, and fewer modification options. But in uncertain markets, choosing flexibility can be the more valuable long-term play.
Below are just a few situations where flexibility matters more:
- Assets in lease-up or transition
- Hold periods exceeding loan term
- Uncertain exit or sale timing
- Exposure to interest rate caps or refinance risk
- Sponsor prioritizing liquidity over IRR maxing
Short-term IRR gains from higher leverage may be outweighed by long-term risks, which flexible structures are designed to manage.
Building a Flexible Debt Playbook: Advisory Tips
At Defease With Ease | Thirty Capital, we help clients build flexible debt strategies that evolve with their portfolios. Here’s how we recommend CRE borrowers approach financing strategy:
- Start with the business plan: Match financing structure to asset business cycle and sponsor risk tolerance.
- Run downside scenarios: Stress-test DSCR, exit cap rates, and refi assumptions to determine covenant and extension needs.
- Balance cost with control: Flexible debt may cost slightly more but offers crucial control in volatile markets.
- Keep an advisory partner involved: Loan terms are negotiable. An experienced advisor can help secure favorable covenants, trigger mechanisms, and embedded flexibility that may not be offered outright.
Curious how a flexible debt strategy could unlock greater value in your portfolio? Connect with one of our debt exerts for a no-pressure discussion — focused solely on strategic, actionable insights.
