The capital stack evolution: How proprietary preferred equity behind Freddie Mac loans solves a key borrower dilemma

The multifamily capital stack is evolving. As elevated interest rates and tighter loan proceeds continue to reshape acquisition and refinancing strategies, investors are challenged by a market where senior loan proceeds and liquidity preservation are constrained. One effective solution is proprietary preferred equity behind Freddie Mac conventional loans.

As demand for preferred equity Freddie Mac structures grows, investors are increasingly using the strategy to create more flexible and efficient capital stacks. Jean-Laurent Pouliot, managing director and senior production officer at Arbor Realty Trust, discusses how the product works, the borrower challenges it helps solve, the advantages of combining preferred equity and Freddie Mac financing through a single lender, and why he believes flexible capital solutions will play an increasingly important role in multifamily finance.

Preferred equity’s role in today’s multifamily market

HW: Preferred equity behind Freddie Mac conventional loans is becoming an increasingly viable financing option among multifamily investors. What is it, how does it work and why is demand growing?

Jean-Laurent Pouliot: At its core, preferred equity sits between senior mortgage financing and common equity. It gives sponsors access to additional capital without sacrificing meaningful control over an asset or locking them into inflexible financing structures.

Most investors use it as a tool for flexibility. While pref equity increases leverage, borrowers often use it strategically to preserve liquidity, reduce the amount of common equity required and execute their business plan. It can help fund capital expenditures, value-add business plans, lease-up initiatives or recapitalizations while preserving ownership economics. 

Demand has increased as interest rates remain elevated and loan proceeds are often lower than borrowers expected. At the same time, many loans originated during the low-rate environment are approaching maturity.

Preferred equity can help bridge financing gaps while allowing investors to continue executing business plans and capturing future upside.

Why certainty of execution matters more than ever

HW: Investors are increasingly focused on efficiency and certainty of execution. How is that influencing financing decisions?

JLP: Historically, investors relied on two primary sources of capital: debt and equity. Preferred equity itself is not new. What is new is the ability to provide preferred equity alongside Freddie Mac financing through the same lender.

Arbor now fills the two formerly separate roles of Freddie Mac lender and preferred equity provider. For years, third-party preferred equity providers often caused delays because they operated under different incentives, timelines and underwriting processes. When preferred equity and senior debt are managed separately, coordination becomes more difficult.

By bringing both components under one roof, everyone is aligned around the same transaction objectives. The underwriting teams, the borrower and the lender are all working toward the same timeline and execution goals. In today’s environment, certainty of execution has become one of the most important considerations for investors. When underwriting, documentation, execution and servicing are coordinated, it significantly improves the overall borrower experience.

Solving borrower challenges with a unified structure

HW: What borrower challenges does this structure solve that traditional financing approaches may not address?

JLP: From Freddie Mac’s perspective, the goal was to create greater consistency around how preferred equity works within agency financing. For borrowers, the benefits are both operational and financial. Integrating senior debt and preferred equity streamlines duplicate reports, appraisals and legal work, creating meaningful cost savings. 

More importantly, borrowers gain alignment across the transaction. Instead of coordinating multiple parties with different objectives, they work with a single lender that manages both components of the capital stack. That creates a smoother process, improves execution and helps keep transactions on schedule.

The advantages of a preferred equity Freddie Mac one-stop shop approach

HW: How does securing senior debt and preferred equity through the same lender improve the borrower experience?

JLP: Freddie Mac financing requires specialized expertise. Arbor has spent years developing a deep understanding of how Freddie evaluates risk, structures transactions and approaches underwriting. That experience helps us anticipate challenges and structure deals in ways that align with Freddie’s framework. 

When that knowledge is combined with proprietary preferred equity, borrowers benefit from a more integrated process. Because we’re working closely with Freddie throughout the transaction, we can create efficiencies, streamline execution and help move deals smoothly from underwriting through closing and servicing. Then, with the senior loan and the pref equity piece serviced under one roof, borrowers receive big advantages not just upfront but throughout the life of the loan. That’s the value of a true one-stop-shop approach.

Determining when preferred equity is the right fit

HW: How should investors evaluate whether preferred equity belongs in their capital strategy?

JLP: The answer depends on the business plan. A straightforward example is an acquisition where loan proceeds cover only part of the purchase price, but the sponsor wants to preserve liquidity and avoid raising additional common equity. Preferred equity can provide that additional capital while allowing the sponsor to maintain control.

Another powerful feature is phased contributions, available only through Arbor. A transaction may qualify for $10 million in preferred equity, but the borrower may only need $2.5 million initially for renovations. The remaining capital can be accessed later as the business plan progresses, helping investors avoid paying for unused capital while maintaining flexibility. Although future preferred equity fundings remain subject to updated underwriting requirements.

Preferred equity can also be effective in refinancing situations, particularly as loans originated during the low-rate environment face today’s higher rates. In some cases, it can help bridge the gap between existing loan balances and new loan proceeds.

The strategy becomes even more compelling when paired with Freddie Mac’s supplemental financing programs. As property performance improves, borrowers may be able to access supplemental financing and use those proceeds to pay down preferred equity.

The future of the multifamily capital stack 

HW: Looking ahead, how do you see the multifamily capital stack evolving?

JLP: The multifamily capital stack will continue evolving toward greater flexibility and sophistication. Interest rates remain elevated, senior loan proceeds are constrained in many cases, and investors are increasingly focused on preserving liquidity. Those dynamics should continue supporting demand for preferred equity.

We’re also seeing investors move away from viewing preferred equity as a last-resort financing tool. It is becoming an increasingly intentional component of the capital stack because it can complement acquisition, refinancing and recapitalization strategies. Preserving liquidity has become the principal reason sophisticated borrowers are using Arbor preferred equity.

The most effective capital structures going forward will be those that provide optionality throughout the life of an investment. Features such as phased contributions, prepayability, the ability to right-size capital needs over time and compatibility with Freddie Mac supplemental financing give investors the flexibility to adapt as business plans evolve.