We don't just find loans—we engineer your capital stack to minimize WACC and maximize returns
Note: Capital stack percentages shown below are illustrative ranges that must sum to 100% of total capitalization. Actual allocation depends on property type, sponsor profile, and market conditions.
Best for: Highest leverage needs, stabilized assets, patient closings (9-12 months). Superior for skilled nursing and assisted living. Lowest cost of capital but longer timeline.
92.5% Rule: FHA-insured first mortgage plus any private secondary financing (including mezzanine) cannot exceed 92.5% of FMV. This constrains total debt leverage and impacts mezzanine/preferred sizing. ORCF approval required for all mezzanine financing.
Best for: Faster execution (60-90 days), more property type flexibility, strong sponsor profiles. Competitive pricing with more streamlined process than FHA.
Mezzanine Considerations: Agency financing is NOT subject to FHA's 92.5% aggregate debt limit, which can enable higher total leverage in some cases. However, Agency mezzanine must be originated by approved DUS Lender Affiliates or receive case-by-case Fannie Mae approval, making it potentially more difficult to source than third-party mezzanine available with FHA financing.
Best for: Value-add repositioning, occupancy stabilization, pre-stabilization before permanent financing. Often bridges to FHA or Agency takeout. Essential for assets requiring 12-36 months of operational improvements.
Note: Availability varies significantly by deal size, sponsor quality, and senior lender program. More readily available for transactions $25M+ with institutional sponsors. Provides tax-advantaged bridge between senior debt and equity.
FHA 232 Constraint: For FHA-financed deals, mezzanine counts as private secondary financing subject to the 92.5% aggregate limit (FHA + mezz ≤ 92.5% FMV). Repayment must come from surplus cash only. ORCF approval required during application process.
Agency Financing: Fannie Mae and Freddie Mac do NOT impose a 92.5% aggregate debt cap. However, Agency mezzanine has its own significant constraints: For Fannie Mae, mezzanine must be originated by an approved DUS Lender Affiliate (DLA) OR receive case-by-case approval from Fannie Mae's Deal Team (requiring early coordination). For Freddie Mac, mezzanine availability varies by program and some programs prohibit it entirely. While Agency avoids FHA's hard 92.5% ceiling, accessing mezzanine through Agency programs may be more difficult and less readily available than through independent third-party mezzanine lenders.
Structuring options: Current pay (lower WACC impact, cash drag) vs. accrual (higher WACC, preserves cash flow). Can be structured as debt for tax purposes. Often includes modest profit participation above preferred return.
Sponsor consideration: Higher leverage reduces required common equity, improving sponsor returns but increasing financial risk. Optimal equity percentage balances return maximization with prudent leverage.
Structure to qualify for highest LTV FHA/Agency programs (lowest cost capital). Proper positioning and underwriting optimization unlocks maximum proceeds.
Balance between tax-deductible mezzanine and equity-like preferred structures. Consider current market pricing, cash flow impact, and tax efficiency.
Reduce expensive common equity requirements without over-leveraging. Strategic use of middle capital preserves sponsor returns while maintaining prudent leverage.
Structure debt and preferred equity to maximize tax deductibility. Interest expense deductions create meaningful WACC advantages versus pure equity structures.
Understanding the differences between FHA 232 and Agency financing is critical when structuring complex capital stacks with mezzanine debt. The choice of senior lender can significantly impact your ability to layer additional debt.
| Feature | FHA 232 | Agency (Fannie/Freddie) |
|---|---|---|
| Maximum First Mortgage LTV | 80-85% | 75-80% |
| Total Debt Limit (First + Mezz) | 92.5% Maximum ⚠️ | No Hard Cap ✓ |
| Maximum Mezzanine (with 80% first) | 12.5% (to reach 92.5%) | Varies by DSCR (can exceed 15%) |
| Mezzanine Approval Process | ORCF approval required (allows third-party lenders) | DUS Lender Affiliate OR Fannie Mae case-by-case approval (more restrictive) |
| Third-Party Mezzanine Sources | Widely available with ORCF approval | Limited (requires DLA or special approval) |
| Mezzanine Repayment Source | Surplus cash only | Not restricted |
| Processing Timeline | 9-12 months | 60-90 days |
| Best Use Case for Mezzanine | Access to third-party mezz lenders, smaller deals, up to 12.5% mezz within 92.5% cap | Established DUS lender relationships, $25M+ deals, can exceed 92.5% total debt if approved |
Key Insight: The choice between FHA 232 and Agency for mezzanine financing is context-dependent. FHA 232's 92.5% aggregate debt cap is a hard limit, but allows widely available third-party mezzanine lenders with ORCF approval. Agency financing has no 92.5% cap but restricts mezzanine to DUS Lender Affiliates or requires case-by-case Fannie Mae approval, making it potentially more difficult to source—especially for smaller deals or sponsors without established DUS relationships. For larger deals ($25M+) with strong sponsor credentials and DUS lender relationships, Agency may offer superior flexibility. For smaller deals or those requiring third-party mezzanine, FHA 232 may be easier to execute despite the percentage constraint.
A common question: Can you circumvent the 92.5% FHA limit by placing secondary debt at a holding company (holdco) level above the property-owning borrower (propco), rather than directly at the borrower entity?
Short Answer: No. HUD's definition of "private secondary financing" captures debt secured by "direct or indirect equity interests" in the borrower. This language is specifically designed to prevent holdco workarounds.
HUD's Position: Mezzanine debt secured by equity in the holdco is secured by an "indirect equity interest" in the Propco (the FHA borrower). Therefore, it counts toward the 92.5% aggregate limit.
The market solution for exceeding 92.5% total leverage is to use preferred equity (not debt) at the holdco level. Because preferred equity is equity—not debt—it does NOT count toward the 92.5% debt limit.
*This structure achieves 97.5% total leverage while remaining compliant with FHA's 92.5% debt limit. The preferred equity is NOT debt, so it sits outside the regulatory constraint.
To avoid being recharacterized as debt for FHA purposes, the preferred equity must have equity-like features: no mandatory redemption dates, distributions from available cash only, subordinated to all debt, and no enforcement rights during the FHA loan term. If structured as "debt-like" preferred equity, HUD may count it toward the 92.5% limit.
Mezzanine debt: 10-14% rate, tax-deductible
Preferred equity: 12-16% IRR target, NOT tax-deductible
The higher cost of preferred equity (and lack of tax deductibility) is the price paid for exceeding the 92.5% debt constraint. However, for highly leveraged deals, the ability to minimize sponsor equity can justify the higher cost of preferred capital.
Holdco-level preferred: Structurally subordinated to propco debt; receives distributions only after all propco obligations satisfied. Cleaner from FHA perspective but potentially less attractive to preferred investors.
Propco-level preferred: Counts as part of the 7.5% minimum equity requirement for FHA. May be more attractive to investors but reduces room for mezzanine debt.
While preferred equity is more expensive than mezzanine on a nominal basis, the ability to achieve 95-97.5% total leverage (vs. 92.5% with debt only) can still result in attractive sponsor returns. The key is minimizing the most expensive capital: common equity.
Professional Guidance: Any structure designed to exceed the 92.5% FHA limit should be reviewed with experienced FHA 232 counsel and disclosed to ORCF early in the application process. Attempting to structure around the rule without proper disclosure risks denial, delays, or post-closing violations. The preferred equity solution is well-established in the market and, when properly structured, is the compliant path to higher leverage.
Through strategic capital stack optimization, we typically reduce Weighted Average Cost of Capital (WACC) by 50-150 basis points compared to default structures. On a $20M deal, this translates to $100,000-$300,000 in annual savings—compounding over the hold period to significantly improve IRR and cash-on-cash returns.
Example: Optimizing from 80% senior debt + 20% equity (WACC ~9.5%) to 80% senior debt + 7.5% mezzanine + 12.5% equity can reduce WACC to ~8.2%, saving $260,000 annually on a $20M capitalization.
For FHA 232 transactions (refinance and acquisition under Section 223(f)), the aggregate amount of the FHA-insured first mortgage plus any private secondary financing (including mezzanine debt) cannot exceed 92.5% of Fair Market Value.
Strategic implication: FHA's 92.5% cap means capital stack design must carefully balance senior debt maximization against mezzanine capacity. This constraint often makes preferred equity or common equity the marginal capital source above ~85-87.5% total leverage.
Let's discuss how we can structure your senior housing financing to minimize WACC and maximize returns.