CRE Back Leverage


The Role of Back Leverage in CRE


Historical / Foundational Context


Historically, banks have been one of the largest debt providers in the commercial real estate (CRE) sector. This changed dramatically during the most recent interest rate hiking cycle, where the Federal Reserve raised the Fed Funds rate from 0% to 5.25% in a relatively short time frame. As a result, regional banks across the country experienced significant pressure, particularly from billions in unrealized losses on their books as changes in the risk and reward spectrum challenged asset values. Banks use funds from depositors to issue loans, which they then hold on their balance sheets or sell to the market (other banks / investors). When interest rates are stable or declining, these loans, considered assets, retain or increase in value. However, when interest rates rise, loans made at lower rates lose value, creating substantial risk for banks.


In addition to originating and holding loans, banks also purchase bundles of loans or fixed-income securities from others. The combination of sharp rate increases and leveraging fundamentals contributed to the collapse of Silicon Valley Bank, Signature Bank, and First Republic in March 2023—marking the third and fourth largest bank failures since 2001. Banks are in the business of borrowing short from depositors and lending long, which creates a potential mismatch between their assets and liabilities when depositors seek withdrawals. With rising interest rates, banks’ balance sheets became impaired by underwater securities, leading to a severe reduction in liquidity—something that the CRE industry relies on to function.


In response, private debt funds emerged to fill the gaps left by regional banks. These funds have grown in number, stepping in to provide capital to the CRE market. However, despite banks originating fewer loans directly to CRE borrowers, they continue to have ways of maintaining market share—chiefly through back leverage.


What is Back Leverage?


Back leverage refers to financing provided to private debt funds, enabling them to enhance their loan originations, acquire new loans, or leverage existing positions. Private debt funds typically borrow capital from third parties—such as banks—to finance these activities. By using back leverage, funds can improve returns on equity by lowering their cost of capital, thus reducing the equity required to fund new loan originations or acquisitions. This financing model allows banks to gain indirect exposure to the illiquid assets that back the debt fund’s loans.

Back leverage gained popularity when interest rates were near zero because it allowed funds to enhance returns at a very low cost. However, as market conditions soured and interest rates rose, back leverage providers reassessed their exposure to potential losses, leading to a more cautious approach. This hesitation resulted in a reduction in the willingness of back leverage providers to extend additional leverage to debt funds.


Goal of Back Leverage


The goal of back leverage is to create a mutually beneficial relationship between fund sponsors (private debt funds) and third-party funding institutions (banks). For the bank, back leverage provides an opportunity to optimize profitability and balance risk through proper structuring. For the fund sponsor, it enables greater returns on equity while increasing their investment capacity.

Achieving the right back leverage structure requires careful balancing of regulatory and tax considerations alongside the sponsor's goal of securing a more cost-effective and diversified capital base. By optimizing the structure of back leverage, both parties can maximize value while managing their respective risks.


Back Leverage Structures


The primary back leverage structures include loan-on-loan facilities, repo agreements, and private securitizations.

Sometimes these structures can be used for transitional assets that require bridge or construction financing. By utilizing master repurchase agreements, a bank can essentially back a sponsor's business plan, providing capital for new loan originations. Typically, the Sponsor approaches the bank to see if they have an appetite to place a loan on their line or books. The agreements outline several financial covenants to effectively manage risk for the third party.


In some structures, loans or assets are transferred to a special purpose vehicle (SPV). The SPV issues a senior note to the bank lender, while the junior note is held by the fund sponsor. This allows the bank to put up less capital, which increases its lending capacity and reduces risk exposure.


Repurchase agreement structures are often more costly, complex, and reserved for larger funds and financial institutions while loan-on-loan structures are easier and more efficient to execute for small and mid-sized fund managers.

In all back leverage structures, the bank and the fund sponsor work together to balance their risks and rewards. Lenders typically include risk mitigation provisions in the agreements, such as mark-to-market terms, loan-to-value (LTV) thresholds, recourse clauses, and margin call provisions. For example, if the net operating income (NOI) of a property securing a mortgage declines, the lender can issue a margin call to adjust the advance rate provided to the fund sponsor.


Impact of Back Leverage on CRE


Back leverage depends on market stability. Lending is driven by confidence in risk assessment, and for the CRE market to function effectively, there must be consensus on risk pricing. Since credit and mortgage flows play a critical role in determining real estate valuations, any significant shift in liquidity can either stall or accelerate investment activity.

In recent years, back leverage took a backseat due to market volatility. However, it is slowly re-entering the market, albeit with increased safety provisions and more cautious decision-making. As banks regain confidence in market stability, they are more likely to offer back leverage facilities to alternative credit providers, which will, in turn, enhance liquidity and contribute to price discovery for real estate assets. It is safe to say we may see a material increase in types and complexity of structures as lenders aim to capitalize on creating value by filling marketplace and capital stack voids.

Building to Hold vs Building to Sell

By Christian O'Neal • July 31, 2025
Why Building and Holding Real Estate for the Long- Term Delivers Superior, Tax-Efficient Yield 

Rent Control - Does it Work?

By Christian O'Neal • July 31, 2025
Rent Control: A Well-Intentioned Policy That Misses the Mark In the debate over affordable housing, few policies stir as much emotion—or controversy—as rent control. Advocates see it as a way to shield tenants from rising rents. Critics argue it does more harm than good. When you examine the economic evidence and real- world outcomes, the conclusion becomes clear: rent control is a deeply flawed solution to a real problem. What Is Rent Control? Rent control is a policy that limits how much landlords can increase rent, either through caps tied to inflation or fixed annual percentages. On paper, it sounds compassionate: protect renters from displacement and make cities more affordable. But in practice, rent control reduces the supply of available housing, discourages new development, and often hurts the very people it's meant to help. Why Rent Control Backfires 1. It Discourages New Construction Developers are less likely to build in markets where future rent growth—and thus returns—are capped. Why take the risk of developing multifamily housing in a city where your upside is limited and your operating environment is politicized? 2. It Drives Property Owners Out of the Market Faced with strict rent regulations, landlords may convert rental units to condos or remove them from the market altogether. Fewer units mean more scarcity, which ultimately drives prices higher for everyone else. 3. It Distorts Housing Allocation Rent control encourages long-term tenants to stay in apartments they might otherwise outgrow or vacate. This locks up valuable housing stock and prevents more dynamic turnover, often freezing lower-cost units in place for higher-income tenants. 4. It Creates a Two-Tiered Market Markets with rent control often develop into two separate ecosystems: regulated apartments that are underpriced and hard to find, and unregulated units with inflated prices to compensate for suppressed supply. The California–New York Split: A Tale of Two Approaches Historically, California and New York have been peers in over-regulating rental housing. But recently, they’ve taken different paths: California's Recent Steps Forward:  Voters rejected rent control expansion (Prop 21 and earlier Prop 10)  Streamlined approvals and reduced CEQA abuse to promote new development New York's Recent Moves Backward:  Passed “Good Cause Eviction” law—effectively rent control in disguise  Political calls for rent freezes and demonization of landlords If you’re an open-minded apartment developer evaluating both markets today, California’s message is increasingly: We need you. New York’s? Not so much. To be fair, both are still difficult places to build housing, and cities like Los Angeles and Berkeley remain deeply anti-development. But California has shown progress by recognizing that you can’t claim to be pro-housing while simultaneously vilifying those who create and operate it. A Misalignment of Incentives A core problem with rent control is that it treats housing supply as fixed and ignores the private sector's role in expanding it. If developers and operators are stripped of potential upside—and burdened with unpredictable political risk—they simply stop building. Even well-intentioned pro-development plans (like NYC’s "City oare undermined when operators believe they’ll be punished after delivery through hostile regulation or public scorn. You can't be truly pro-development unless you're also pro-operator. Policies that foster collaboration, not scapegoating, create the conditions for long-term affordability. The Real Way Forward Instead of imposing artificial caps, cities should focus on increasing housing supply through zoning reform, expedited approvals, and public-private partnerships. The more units that come online, the more pricing power shifts away from landlords and toward tenants—naturally. Rent control is seductive in its simplicity but devastating in its consequences. It’s a policy that tries to solve a supply problem with demand-side restrictions—and in doing so, it often makes things worse. At Alpha Equity Group, we believe that smart, sustainable development is the key to housing affordability. And that requires sound economics, not political theater.

Into the Future – Making Sense of Rates in a World That Doesn’t

By Christian O'Neal • June 24, 2025
In the world of capital markets, clarity is often fleeting — and today, it feels downright elusive. The Federal Reserve’s latest June dot plot offered little in the way of certainty. While the median projection sees the Federal Funds Rate in the mid-3% range by the end of 2026 , the dispersion among voting members is striking. Seven members predict no rate cuts in 2024 , reflecting just how divided the committee remains in the face of conflicting data. This latest update marks a 25-50 basis point shift downward from May , but the overarching theme is one of caution, not conviction. That sentiment is mirrored in the economic projections. Core PCE inflation , the Fed’s preferred inflation measure, is now expected to end 2025 at 3.0% , 30 basis points higher than earlier forecasts. Meanwhile, real GDP is forecast to slow from 2.3% in Q4 2024 to just 1.7% in 2025 — another sign that the lagged effects of monetary policy are expected to begin to show. At the same time, the Fed’s balance sheet has shrunk dramatically, from a peak of $9 trillion in April 2022 to just $2.3 trillion today . That quantitative tightening, coupled with a lack of consistent inflation suppression, leaves both equity and bond markets vulnerable to further volatility. This all feeds into an uncomfortable truth: rates are likely to remain higher for longer , and the market is struggling to price that reality. The VIX index , a 30-day forward-looking gauge of volatility in equities, is trending higher. When volatility rises even as indices fall, credit spreads widen , liquidity tightens, and financing risk surges. For commercial real estate investors , this has enormous implications. As we explored in our recent article on CRE Price Discovery , the market remains in flux. The bid-ask spread in real estate is still somewhat wide, and most transaction activity today is being driven by maturing debt — not opportunistic investments banking on future growth. This means valuations are being forced downward, especially for assets that were purchased or refinanced at ultra-low rates in 2021–2022. Consumer behavior is also in transition. Household formation is slowing, and personal savings rates are slowly ticking up although they are significantly down from longer term averages – which could reflect folks bracing for economic turbulence. U.S. household formation currently stands at 1.058 million, down 7.68% from last month’s 1.146 million and down 47.73% from 2.024 million a year ago. Looking globally, demand for U.S. Treasuries remains a critical economic indicator that has trickling effects on the economy . A strong bid-to-cover ratio — like the 2.67x seen at the June 11th 10-Year Treasury auction , with nearly 88% of bids from foreign banks — is encouraging. It suggests continued faith in U.S. fiscal credibility and currency strength despite market apprehensions in our strength, such as the US credit rating being downgraded by Moody’s. This equilibrium is rather fragile. Should the U.S. continue to run massive budget deficits with a debt-to-GDP ratio north of 120% , investors may begin to demand higher yields — or worse, seek refuge in alternative stores of value. Gold is one such store. The World Gold Council recently reported that 76% of central banks expect to increase their gold holdings over the next five years , up from 69% in 2023. This flight to real assets reflects growing concern about the long-term value of fiat currencies — and a desire to hedge against systemic risk. The Bottom Line  Rates are likely to remain high through 2025 and into 2026 Inflation remains persistent but progress has been unclear Growth is slowing, and volatility is rising Real estate is repricing around debt maturity events Global capital is shifting cautiously, looking for safety At Alpha Equity Group, we believe this is a time for discipline, not risk-taking. We’re staying patient, watching the data, and investing defensively — focusing on secured debt positions and capital preservation. While others chase uncertain upside, we’re building long-term value through downside protection while we wait out the convergence of dozens of factors completely outside our control.
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