Revolvers Make a Comeback
The BTR (Build-to-Rent) market has recently underperformed due to market saturation, high construction costs, rising interest rates, lower rental yields, and concerns about renter flexibility—all contributing to higher vacancy rates and slower rent growth in some regions.
Simultaneously, capital markets have significantly tightened construction lending. Post-2022, lenders have reduced max senior financing from 85% loan-to-cost (LTC) to a more conservative 70-75% range. Even as some lenders now model deals with for-sale or for-rent flexibility to provide developers with multiple exit strategies, takeout DSCR (debt service coverage ratio) constraints have meant that most BTR deals simply cannot pencil to their full proceeds. This financing gap has forced developers to reconsider their capital structure approaches entirely.
In the flight to for-sale, revolving debt has emerged as the solution for developers seeking better economics, effectively reaching up to 90% LTC. Unlike traditional financing—which provides a lump sum with fixed repayment schedules—revolvers establish a maximum borrowing limit that developers can repeatedly access and repay throughout the project lifecycle. With a 100% cash sweep on sales, even with peak funding in the 60-70% LTV range, projects become less risky for lenders while still allowing high leverage.
This structure is particularly well-suited for phased residential community development, where capital needs fluctuate between acquisition and development (A&D) and vertical construction, and where sales can occur simultaneously with development. If sales slow, developers can temporarily reduce construction pace without fixed repayment pressures; in favorable conditions, they can accelerate by drawing additional capital.
Revolvers also typically feature more accommodating covenant packages with dynamic calculations that recognize the evolving nature of development projects. This provides crucial flexibility during unexpected challenges like permitting delays, cost overruns, or market disruptions that might trigger defaults under more rigid financing arrangements.
What’s particularly fascinating is how revolvers have reinvented themselves in today’s market. Some developers are now pairing facilities with preferred equity to maximize returns while further managing risk. Many negotiate performance-based pricing that reduces interest rates as projects meet sales milestones.
The resurgence of revolving debt signals a fundamental shift in how smart developers approach risk—embracing financial structures that bend but don’t break when market headwinds inevitably arrive.
Slatt Capital’s Structured Finance practice is based in Los Angeles and offers first-class expertise to execute a variety of financing options beyond traditional debt financing. Our platform provides solutions for various types of capital, including senior debt, JV and Co-GP equity, construction, bridge, mezzanine, and preferred equity. Our experts have deep experience in every product type, including multifamily, BTR, office, industrial, retail, student housing, senior housing, and hospitality.