Refinance Risk in Apartment Syndications: What Happens When the Loan Matures
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Refinance risk is the risk that when an apartment loan matures, a new loan will not be large enough to repay it. The new lender sizes the loan on the building's income at that time, interest rates at that time and the value at that time, using the same loan-to-value and debt service coverage tests as any loan. If rates or cap rates have risen, or income has not grown as planned, the new loan can come in well below the old balance. In the example below, a $7,000,000 loan maturing in year 5 can only be refinanced for about $6,036,000, leaving a gap of about $964,000 that has to come from somewhere: reserves, investors, a new kind of capital, an extension or a sale.
This post is part of our guide to real estate syndication. It works through one maturity, the ways deals close a gap, and what to ask before you invest. Figures are as of November 2026 and the example is illustrative.
A worked example
A building was bought with a $7,000,000 interest-only loan maturing in year 5. The plan assumed NOI would grow to $750,000 and rates would fall. Instead, NOI at maturity is $650,000 and new 30 year loans price at 7.0%. The new lender allows 65% loan-to-value and 1.25x coverage. The figures are an example.
| Test at maturity | Result |
|---|---|
| Value at a 7.0% cap rate ($650,000 ÷ 7.0%) | $9,285,714 |
| 65% loan-to-value | $6,035,714 |
| 1.25x coverage at 7.0% (loan constant 7.98%) | $6,513,328 |
| New loan (lower of the two) | $6,035,714 |
| Gap to repay the $7,000,000 loan | about $964,000 |
Even at $650,000 of NOI, if rates had fallen to 5.5% and the cap rate had stayed at 6.0%, the same tests would have allowed about $7,042,000 on value and about $7,632,000 on coverage, enough to repay the loan. The gap came from both a higher cap rate and a higher rate. See DSCR loans and loan sizing and cap rate compression and expansion.
How do deals close a refinance gap?
| Option | How it works | Cost to investors |
|---|---|---|
| Reserves | Use cash already held by the deal | Lower reserves for later needs |
| Capital call | Investors put in more money | New money at risk; dilution for those who do not fund; see capital calls |
| Preferred equity or a rescue investor | New capital that is paid before existing investors | Existing investors' returns fall; see preferred equity vs mezzanine debt |
| Loan extension | The existing lender extends the term, often for a fee, a paydown or tighter terms | Fees and a paydown come from the deal's cash |
| Sale | Sell the building and repay the loan | Lower returns, possibly a loss, if the market is weak |
| Loan modification or default | Negotiate with the lender, or hand the building back | Severe; investors can lose all of their money |
When is refinance risk highest?
- Short loans on long plans. A 3 year bridge loan on a 5 to 7 year plan must be refinanced mid-plan. See bridge vs agency loans.
- Floating rate loans with a cap that expires. Extension may require a new, more expensive cap. See interest rate caps.
- Interest-only loans. Nothing has been repaid, so the full balance comes due.
- Plans that need NOI growth to refinance. If the business plan is late, the refinance is too.
- High leverage at purchase. Less room before the new loan falls short.
What should investors ask?
- When does the loan mature, and does that match the planned hold?
- Are there extension options, and what do they require (fees, a paydown, coverage tests, a new cap)?
- What does the refinance look like if rates are 1 point higher and the cap rate is 0.5 points higher than today?
- How large are reserves, and can the operating agreement call more capital? See syndication reserves.
- Is there a plan if the refinance falls short? See the sponsor playbook for an underperforming deal.
Every investment can lose money, and a refinance that falls short is one way an apartment syndication can lose it.
How DoorRaise fits in
DoorRaise does not lend or arrange loans. It helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers. DoorRaise forms the deal's LLC, prepares the offering documents, which describe the loan, its maturity and its risks for investors, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust, and distributions are quarterly by default. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Before you invest, use the free list of questions to ask a sponsor.
FAQ
What is refinance risk in real estate?
The risk that, when a loan matures, a new loan cannot be obtained for enough to repay it, because income, rates or values have changed.
What happens if a syndication cannot refinance?
The sponsor looks for other options: reserves, a capital call, preferred equity, a loan extension or a sale. If none works, the lender can foreclose and investors can lose their investment.
How is the new loan amount set at refinance?
The same way as any loan: the lowest of the amounts allowed by loan-to-value, debt service coverage and, for some lenders, debt yield, using current income, rates and value.
Can the existing lender extend the loan?
Sometimes. Many loans have extension options with conditions, and lenders may negotiate an extension for a fee or a paydown. It is not guaranteed.
How can investors reduce refinance risk?
Favor deals whose loan term matches or exceeds the planned hold, with moderate leverage, extension options and enough reserves, and ask for the refinance tested at higher rates.
Sources
- Fannie Mae Multifamily, fixed-rate mortgage loans
- Freddie Mac Multifamily, Optigo Conventional Small term sheet
- Federal Reserve Bank of New York, Secured Overnight Financing Rate data
This article is general information, not legal, tax or investment advice. The example loan and figures are illustrative. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.