“Your position in the capital stack determines everything. The lender always gets paid first. It’s not about the property—it’s about where you’re sitting at the table.”
— Bronson Hill
If your distributions went to zero, I have something that actually may make you feel a little better.
Now, I’ve had this conversation more times than I can count in the last two years.
Somebody invested 100 grand, 200 grand, sometimes a lot more into an apartment deal in 2021 or 2022.
Now, the updates were great for a while, then the checks got smaller, and then they stopped, and then came the email that nobody wants to open.
And the investor’s first thought is always the same.
Did the property fall apart?
Did the tenants stop paying?
Almost never.
But here’s what actually happened in those situations.
1. The Bridge Debt Trap: When Rates Rise Faster Than Rent
The first point is understanding what went wrong.
In 2021 and 2022, money was cheap.
Debt was cheap, bridge debt, floating rate, two, three-year terms, interest only.
The plan was pretty straightforward, and a lot of smart people believed it, including us.
Buy the property, renovate units, push the rents, then refinance into a nice long-term agency loan at a low fixed rate.
Everyone gets paid.
But two things broke that plan.
The first thing is that the Federal Reserve raised rates faster than almost anyone alive had ever seen.
It was actually over 40 years, basically since about 1980.
So if your loan floats and rates go up four points, then your debt service goes up with it every single month.
The rent didn’t change, the occupancy didn’t change.
Actually, expenses usually went up because of inflation, and the mortgage payment had nearly doubled.
So a lot of sponsors were really caught on their back foot.
Some of them brought rate caps to protect against it.
But the rate caps expire after a couple of years.
And so it costs, you know, what costs $40,000 for a rate cap, which caps how much interest rates will go up for a couple of years.
Now it costs a million dollars.
2. The Capital Stack: Why the Lender Always Gets Paid First
The second thing is that when this happens, the values reset.
You buy a building at a 4% cap rate and the market now prices that same building at a six cap.
So the value drops.
Not by a little, but estimates on properties 20 to 30 percent lower, some as much as 40 percent.
So what do you do when you have a property where the debt payment goes up and the value goes down?
The refinance was supposed to save everybody.
The lender looked at the new numbers and said, you need to bring five million dollars to the table before we do this.
They want cash in refinance.
That’s what a capital call is.
And that’s why the distribution stopped.
And here’s the part that stings.
The property could be 94 percent occupied.
The tenants might be paying on time and the operator might be doing a genuinely good job.
The building is fine.
The capital structure is what failed.
It’s not just bad luck, but it was, you know, roughly, you know, 875 billion dollars of commercial and multifamily mortgages due in 2026.
So that’s about 17 percent of all commercial real estate debt outstanding in this country.
It’s big.
And multifamily delinquency on securitized loans crossed 6.5 percent earlier this year.
And of these loans that were given this bridge debt in 2021, about 80 percent are actually underwater.
3. Who Gets Paid: The Brutal Truth About the Capital Stack
Through every bit of that somehow on that property, somebody got paid every single month on time, the full amount.
And think about this.
Who got paid the full amount?
It was the lender.
It was the person who wrote the loan.
They were first in line.
They weren’t in equity, which is higher up in the stack.
They got paid before the operator, before the pref equity and before you.
And that wasn’t luck.
That wasn’t a better property.
It was a better seat.
It’s where you’re seated at the table.
Your position in the capital stack determines everything.
Equity is up here on the top.
It gets the upside, but equity is also they go to zero first.
Debt doesn’t get the upside and debt gets paid first.
Most passive investors have never once been asked which one they actually want.
The Closing Block
If you’re sitting in a deal right now that stopped paying and you wonder what you’re looking at, reach out.
I’ve read a lot of these.
I can tell you honestly what I see.
I’m not going to pitch you anything on that call.
It’s just really trying to help you to understand why a deal has stopped working.
The best investment you can make is in your own education.
So thanks for taking time to watch this video.
We create these because we want to help you make better, better decisions, better investing decisions so you can fire yourself.
If you’re not on our investor list, we have an amazing debt fund that we’re working with where you are at the first position of the stack and this stuff pays really well.
It pays like equity was paying a few years ago and it’s much, much more stable.
So if you’re interested in learning about that, go to bronsonequity.com or click the link below.
Check out bronsonequity.com/join.
We look forward to seeing you in the next video.
