By Taylor Williams DALLAS — Just 18 months ago, multifamily lenders and investors in major Texas markets were underwriting record-high levels of rent growth to accompany historically low cap rates, giving capital sources little hesitation to lend at negative leverage. Following a spate of nearly a dozen interest rate hikes, the opposite is now mostly true. Negative leverage occurs when a buyer’s going-in capitalization rate is lower than the all-in interest rate on the debt attached to the property. The scenario tends to manifest when a property with an encumbered cash flow is purchased in a high- or rising-interest-rate environment. As a rule of thumb, net operating income should comfortably cover debt service, or at least clearly be moving in that direction at the time of acquisition. When times are good — meaning prices are high for sellers and money is cheap to borrow for buyers — negative leverage can present a flexible and creative way of getting deals across the finish line. Lenders and equity partners may be willing to accept negative leverage in the short run because they are confident that rents/cash flows will soon increase, or that interest rates will remain low, or both. But the ability to …
