In today’s multifamily market, the old playbook no longer works on its own. Elevated interest rates have reshaped the cost of capital, while slowing transaction volume has limited liquidity and exit opportunities. Over the past four years, the Federal Reserve’s aggressive rate hikes—the steepest cycle in decades—have created turbulence across the industry. Debt costs have soared, refinancing has become more difficult, and many deals underwritten in the low-rate era now face pressure to recalibrate. Even well-performing assets—those with strong occupancy and consistent rent growth—are not immune to these headwinds.
Success now requires more than managing day-to-day property operations; it requires a deeper level of financial creativity. Multifamily sponsors must think beyond the fundamentals of location and management, using innovative capital strategies to bridge today’s challenges and preserve tomorrow’s opportunities.
For multifamily sponsors, that creativity often takes shape through hope notes and recapitalizations. These two structures—one addressing debt, the other addressing equity—can make the difference between a forced sale and a long-term strategic hold. They are critical tools that allow strong properties to remain operational, protect investor capital, and position assets for sustained growth.
These strategies may not grab headlines, but they are increasingly the difference between a property that falters under pressure and one that survives, stabilizes, and ultimately thrives. For investors, understanding these tools is key—because they directly impact capital preservation, risk mitigation, and future returns.
Understanding Creative Capital Structures in Multifamily Investing
When conventional financing becomes restrictive, creative capital structures become essential. Beyond traditional senior debt and common equity, today’s market has seen increased use of preferred equity, mezzanine financing, recapitalizations, and “hope notes.” These mechanisms allow sponsors to adapt in a dislocated environment—preserving investor capital while maintaining long-term upside.
The backdrop is critical. Over the past four years, the Federal Reserve raised benchmark interest rates by 525 basis points, the steepest hiking cycle in decades. That surge has doubled or even tripled debt costs for many borrowers compared to their original underwriting. At the same time, valuations have moved lower: Green Street’s Commercial Property Price Index ended 2023 roughly 19% below its March 2022 peak, with multifamily among the hardest hit.
Higher debt costs and falling property values have built a massive “maturity wall” that is now hitting. In 2025 alone, $957 billion in commercial real estate loans will come due — nearly 20% of all CRE mortgage balances. S&P Global projects the wall will keep growing, with maturities nearing $1 trillion in 2025 and peaking at $1.26 trillion by 2027.
That’s where financial creativity steps in. Sponsors leveraging preferred equity, mezzanine debt, recapitalizations, or hope note structures are not adding risk—they’re managing risk. These tools extend hold periods, prevent forced sales, and protect investor returns until debt markets stabilize and property fundamentals reassert themselves. In short, creative capital structures aren’t opportunistic in this cycle; they are indispensable.
What Is a Hope Note in Multifamily Real Estate?
A hope note is a structured debt modification that allows lenders and sponsors to maintain alignment when a property’s loan balance exceeds its market value. The loan is divided into two components:
- Performing Note: The principal amount supported by the current property value and cash flow.
- Hope Note: The remaining balance, deferred and payable only once the property’s value recovers.
This structure allows lenders to maintain a performing asset on their balance sheet while sponsors avoid foreclosure. The performing note typically carries a market-rate interest schedule, while the hope note accrues interest but requires no immediate payment. Repayment occurs only upon refinance, sale, or value recovery, creating shared participation in future upside.
Within the capital stack, the hope note typically ranks junior to performing debt but senior to equity, meaning it is repaid before any residual distributions flow to investors.
Why Hope Notes Matter in 2025–2026
Industry reports estimate that hundreds of billions of dollars in multifamily loans—roughly $770 billion through 2027—will reach maturity between 2025 and 2026, underscoring the refinancing pressure facing owners and sponsors in the near term. Many of these loans originated during low-rate periods and now face refinancing challenges due to compressed valuations and higher debt costs.
A hope note allows both lender and sponsor to avoid a distressed sale by converting part of the loan into deferred, contingent debt.
Example:
A multifamily asset purchased for $50 million in 2021 now appraises at $42 million. Rather than foreclose, the lender restructures the debt—keeping $40 million as a performing note and converting $10 million into a hope note, payable only when the property value recovers.
This structure enables continued operations, ongoing distributions, and the opportunity for both lender and investor to participate in future appreciation.
Historically, hope notes gained prominence after the 2008 financial crisis, when lenders used them to defer losses and maintain performing portfolios. Those who adopted this structure often recovered more value during the 2011–2014 rebound than those who opted for foreclosure. The same principle is resurfacing today, particularly for stabilized, cash-flowing multifamily properties whose fundamentals remain intact despite short-term valuation compression.
How Recapitalizations Strengthen the Capital Stack
While hope notes address the debt side, recapitalizations (recaps) reinforce the equity structure of a deal. A recapitalization allows a sponsor to bring in new partners, restructure existing equity, or reduce leverage—all without selling the property. It is effectively a financial reset that preserves ownership continuity.
When combined, hope notes and recaps can deliver a dual-layer solution:
- Hope Notes: Reduce or defer unsustainable debt obligations.
- Recaps: Inject new equity to stabilize operations, fund renovations, or increase reserves.
Example Scenario:
A property acquired in 2021 faces a loan maturity in 2025. The sponsor negotiates a hope note that defers $8 million of principal and introduces $3 million of new preferred equity through recapitalization. This strategy balances both sides of the capital stack—restoring financial health and positioning the property for refinancing when rates stabilize.
When Sponsors Turn to Hope Notes and Recaps
Sponsors typically employ creative capital structures in three common situations:
1. Debt Maturity Resets
When refinancing is challenging, a hope note bridges the valuation gap and provides short-term stability.
2. Liquidity Events Without Selling
A recap can return partial capital—often 20–40% of the original investment—to early investors while maintaining control and deferring taxes.
3. Temporary Performance Disruptions
During periods of temporary NOI disruption — whether from lease-ups, capital projects, or economic pressure — integrating a hope note with a recapitalization provides the capital cushion needed to protect the asset and avoid forced dispositions.
How Hope Notes and Recaps Fit Within the Capital Stack
Hope notes and recapitalizations redefine repayment priority and distribution flow within the capital stack:
- Senior Debt: Holds the top repayment position and remains first in line.
- Hope Note: Sits below performing senior debt but above equity, repaid once asset value recovers.
- Preferred Equity (from Recap): Earns priority distributions with a capped return profile.
- Common Equity: Retains the long-term appreciation and upside potential.
By clearly understanding an investment’s new position after restructuring, investors can better evaluate risk exposure, return potential, and liquidity timelines.
When structured effectively, a recap aligns every stakeholder’s interests and maintains balanced incentives for value recovery and future growth.
Investor Benefits of Creative Capital Structures
Properly executed hope notes and recapitalizations offer several key advantages for limited partners (LPs) seeking both stability and long-term upside. One of the most important benefits is capital preservation—these structures help avoid distressed sales and protect the underlying equity in a property, even during periods of market dislocation. By restructuring the debt or equity instead of selling, sponsors create breathing room for assets to continue performing while maintaining investor ownership.
Another major advantage—and an investor favorite—is early liquidity. Depending on the structure, a recapitalization can return 20% to 40% of the original investment mid-hold, giving investors access to capital while they still retain ownership in the asset. This strategy delivers the best of both worlds: liquidity and continued participation in future cash flow and appreciation. It also reduces the total capital at risk and gives investors greater flexibility to redeploy funds or diversify their portfolios.
Another significant outcome is enhanced internal rate of return (IRR) potential. Receiving capital back earlier in the investment cycle accelerates realized returns, which can boost IRR by several hundred basis points compared to waiting until the final sale. Meanwhile, investors continue benefiting from ongoing cash flow distributions, as creative structures are designed to maintain steady income streams even during recapitalization or restructuring phases.
Finally, these strategies reflect active risk management. Sponsors implementing hope notes or recaps demonstrate a disciplined, proactive approach to preserving and growing investor value. Adapting financing structures to match current market realities reinforces alignment with investors’ long-term wealth-building objectives and ensures the asset remains positioned for continued success.
Risks and Considerations for Investors
While creative capital structures are designed to strengthen performance and preserve value, investors should carefully evaluate several important considerations before participating in a deal that includes hope notes or recapitalizations. One of the primary factors is complexity. Multi-layered capital stacks can involve multiple parties—senior lenders, preferred equity providers, and limited partners—making transparency and precise documentation essential to understanding how cash flow and repayment priorities are distributed. Investors should review offering materials and financial models closely to ensure clear visibility into each layer of the capital stack.
Sponsor incentives also warrant attention. Alignment should remain performance-based rather than transaction-driven; sponsors must be rewarded for executing the business plan successfully, not simply for completing a restructuring. This alignment of interests ensures that all parties remain focused on long-term value creation rather than short-term gains.
Another key risk involves market conditions. The recovery of a hope note depends on the property’s future appreciation—if market values stagnate or decline, repayment may take longer than anticipated or, in some cases, not occur at all. Similarly, dilution risk can arise when new equity is introduced through a recapitalization, potentially shifting ownership percentages and future distribution allocations for existing investors.
Investors should also understand that timeline extensions are common with these strategies. While recaps may extend the hold period, they often do so to improve long-term returns and avoid selling into unfavorable market conditions. Lastly, execution risk plays a critical role in determining success. The effectiveness of a recap or hope note relies heavily on strong sponsor management, lender cooperation, and disciplined communication. By understanding these dynamics, investors can better evaluate whether the structure enhances their return potential while managing risk appropriately.
Key Investor Questions to Evaluate
Before investing in opportunities that involve hope notes or recapitalizations, investors should conduct thorough due diligence and ask the right questions to fully understand how these structures affect returns, risk exposure, and timelines. These questions help determine whether the strategy is being used proactively to strengthen the investment or reactively to manage short-term challenges. A transparent sponsor should be able to provide clear, data-driven answers supported by financial modeling and market assumptions.
- Does the recapitalization or hope note change distribution priorities or equity splits?
- What assumptions support the property’s value recovery timeline?
- How will cash flow be managed during the interim period?
- Are new equity partners or preferred tranches altering return structures?
- How does this reposition the exit strategy or refinance timing?
Transparent, data-driven answers to these questions indicate that the sponsor’s intent for utilizing a hope note or recapitalization as part of the investment strategy.
Creative Capital Structures: Discipline, Not Distress
Terms like “restructure” often raise concern, but in multifamily real estate, recapitalizations and hope notes are not necessarily warning signs—they’re part of responsible asset management. These tools can reflect a sponsor’s commitment to protecting investor equity, adapting to changing market conditions, and positioning an asset for long-term performance rather than short-term reaction.
A recapitalization or hope note doesn’t eliminate risk, but it can be the difference between a forced sale in a challenging market and a disciplined approach that preserves value and allows time for recovery. In today’s environment, strategic capital management isn’t about avoiding risk—it’s about addressing it head-on with transparency and foresight.
Viking Capital’s Approach to Strategic Capital Structuring
Viking Capital approaches creative capital structuring as an active risk management discipline designed to preserve and grow investor wealth. Each decision begins with a clear objective: maintain stability while positioning for future growth.
During market transitions, Viking Capital actively employs recapitalizations and preferred equity tranches to strengthen investor returns and enhance portfolio stability. We’ve also pursued new investment opportunities by providing hope notes to distressed assets—helping stabilize their performance while creating risk-conscious opportunities for investors that strengthen portfolio resilience and long-term value.
These strategies allow us to:
- Preserve Ownership Control: Retain quality assets even as valuations tighten.
- Enhance Investor Returns: Provide liquidity to existing partners while maintaining upside potential.
- Rebalance the Capital Stack: Introduce new equity and optimize debt obligations.
- Capture Future Appreciation: Prevent distressed exits and position assets to benefit from market recovery.
Viking Capital employs disciplined, strategic approaches designed to preserve investor capital, enhance asset performance, and drive long-term returns. This commitment to thoughtful innovation underscores our core principle: creating sustainable growth while safeguarding investor interests.
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