The Changing Face of Bridge, Mezzanine, and C-PACE Financing

Still-elevated interest rates have made gap financing solutions more essential than ever. A panel of experts breaks down how each of these three tools can support your capital stack.

Elevated interest rates and lingering inflation from the pandemic continue to complicate multifamily financing. Recent market volatility has intensified those challenges, prompting many lenders, especially banks, to take a more cautious stance, according to a recent Federal Reserve report. For many, assembling a complete capital stack from one source has become increasingly difficult. That’s where gap financing plays a more critical role.

In partnership with the National Housing & Rehabilitation Association (NH&RA), we recently hosted a webinar exploring gap financing strategies. The panel of industry experts highlighted how bridge, mezzanine, and C-PACE financing solutions are evolving and where they fit best. While these tools may sound familiar, panelists shared key insights into their changing use cases.

Here are the highlights. (A link to the full recording is below)

Bridge Funding Finds New Purpose

Bridge loans remain a common financing option, but their applications have shifted. Jeff Goldberg, Chief Credit Officer and Executive Managing Director at X-Caliber, explained that disruptions from the pandemic slowed value-add deal execution, which, in turn, delayed access to permanent financing.

“Before 2022, roughly 75% of bridge funding requests were tied to value-add renovation,” Goldberg said. “Now, about 75% of what we see are refinance requests for properties that still need CapEx improvements or have unmet value-add potential.”

He added that as permanent capital sources like Fannie, Freddie, HUD, and CMBS have adjusted their underwriting since 2022, many borrowers face lower-than expected proceeds.

Randy Eckers, a partner at Reed Smith and the panel’s moderator, described many of today’s bridge loans as “a bridge to a bridge”—short-term capital designed to buy time until borrowers can access better rates or higher leverage. Chris Reilly, President and CEO of Lexington Partners, agreed. He cited a southern U.S. project where his team had anticipated permanent financing but instead had to negotiate extensions with the original bridge lender, saying, “It takes persistence and creativity.”

Mezzanine Financing Now Solves Two Problems

Mezzanine financing continues to fill the space between senior debt and equity, but borrowers are using it in new ways.

“With rates where they are, permanent takeouts often fall short of borrower expectations,” Goldberg said. “Even with attractive rates from the GSEs or HUD, DSCR constraints, typically between 1.15 and 1.25, limit leverage. That’s where mezzanine comes in. We often help borrowers bridge that 5% to 10% shortfall, so they can hit their target proceeds.”

In some cases, mezzanine capital supports pre-development  acquisitions. Goldberg noted that X-Caliber has backed borrowers acquiring land ahead of a 4% LIHTC award.  “We provide the pre-development capital while simultaneously underwriting a  221(d)(4) HUD loan, so we’re positioned to move forward as soon as the tax credits are awarded,” he said.

Helping Senior Lenders Embrace C-PACE

C-PACE, (Commercial Property Assessed Clean Energy) programs provide long-term, low-cost financing for energy efficiency and resiliency improvements. Though designed for sustainability upgrades, C-PACE now often serves as a tool to bridge financing gaps.

“The basic structure is consistent across states,” said Sal Tarsia, Managing Partner at CastleGreen Finance. “It supports energy efficiency, water conservation, and building resiliency. That includes upgrades like HVAC systems, lighting, or even low-flow fixtures.”

C-PACE loans function differently from traditional debt. They’re structured as a tax assessment and hold senior status to mortgage payments, which can concern senior lenders. Clear communication about how C-PACE operates is key to gaining acceptance.

“Because C-PACE is treated like a real estate tax, we have to behave like one,” Tarsia said. “We don’t have recourse rights or carve-outs. If there’s a default, we can only collect what’s owed up to that point. We can’t accelerate the full loan.” Senior lenders often view this favorably once they understand the limited enforcement rights of C-PACE lenders.

Watch the Full Webinar