The Debt Behind Failed Syndications: What LPs Should Know About Loan Terms

By Dan Gwynn

In 2021 and 2022, many LPs bought into apartment syndications with the same plan: buy an older property, renovate, raise rents, and sell or refinance within three to five years. When rates rose, many of those deals ran into trouble. The ones that struggled most often shared a second trait: short-term, floating-rate debt.

The data shows the gap. Among loans made in 2021 and 2022, 28.2% of the balance in floating-rate commercial real estate collateralized loan obligations (CRE CLOs) was delinquent or in special servicing in August 2026, according to CRED iQ. For fixed-rate conduit loans from the same years, the figure was 4.5%.

Most LPs read a deal's business plan closely and skim its loan terms. With the Federal Reserve raising rates again on September 16, 2026, the loan deserves equal attention. Here are the debt terms that decide whether a syndication survives a bad stretch.

Fixed vs. Floating Rate Debt

A fixed-rate loan locks the interest rate for the life of the loan. A floating-rate loan resets, usually monthly, at a benchmark plus a fixed spread. The benchmark is the Secured Overnight Financing Rate (SOFR), which moves closely with the Fed's policy rate.

Rate structures run from conservative to aggressive in four steps:

• Fixed rate. The payment is known for the full term.
• Floating with a cap for the full term. The rate can rise, but only to a known ceiling.
• Floating with a shorter cap. Protection ends before the loan does.
• Floating with no cap. The payment has no ceiling.

Floating-rate debt is cheaper and more flexible at the start, and its small prepayment penalties suit a plan to renovate and sell in three years. The tradeoff is that the deal's largest expense moves with the Fed. A $20 million loan at SOFR plus 3.00% cost about $610,000 a year in early 2022, with SOFR near 0.05%. By August 2023, after the Fed raised its benchmark 5.25 percentage points in 16 months, SOFR had reached 5.3% and the same loan cost about $1.66 million.

The difference shows up in how loans made in 2021 and 2022 have performed.

Figure 1. Source: CRED iQ, "CRE CLO Distress Accelerates in August," September 4, 2026.

Rate type is only part of the story. More than half of Freddie Mac's 2021 K-Deal volume was floating-rate, according to an LSEG analysis, yet Freddie's pools from those years sit at 2.0%. Those were longer-term agency loans on stabilized properties, while bridge loans fund properties mid-renovation on two- or three-year clocks. KBRA's study of 6,919 CRE CLO loans found 22.9% had defaulted or been modified. Fixed-rate debt removes rate risk until maturity, covered below.

Rate Caps: Protection With an Expiration Date

Most floating-rate lenders require the borrower to buy an interest rate cap, a contract that pays out when SOFR rises above a set level, called the strike. With a 3.00% strike, the $20 million loan above could not go above 6.00%, holding interest near $1.2 million a year instead of $1.66 million.

Caps have two limits. They protect against the worst case only: the capped loan still cost nearly twice its 2022 interest. And they are often bought for two or three years, so they can expire well before the loan does.

Replacing an expired cap costs whatever the market charges that day. Chatham Financial data reported by Commercial Observer showed a two-year cap on a $25 million loan at a 4% strike cost $569,000 in March 2023, up from $97,000 a year earlier. That cost can force a sponsor to pause distributions.

Interest-Only vs. Amortizing Loans

An interest-only (IO) loan requires interest payments with no principal paydown. An amortizing loan pays down principal each month on a set schedule, often 30 years. Payment structures also run from conservative to aggressive:

• Fully amortizing. Principal falls from the first payment.
• Partial IO. One to five years of IO, then amortization.
• Full-term IO. No paydown at all, typical of bridge loans.

Amortization is more conservative because every payment builds equity. On a $20 million loan at 6.00% with a 30-year schedule, the balance falls by about $1.4 million in five years. That is nearly half of the 15% median refinance shortfall covered below, and a smaller balance gives a sponsor more options at maturity.

IO raises early cash flow and distributions, and the jump when it ends can be large. The same loan costs $1.2 million a year interest-only and about $1.44 million amortizing, 20% more. If the property earns $1.6 million of net operating income, cash flow after debt service falls from $400,000 to about $161,000, a 60% drop. The debt service coverage ratio (DSCR), a lender's measure of income over loan payments, falls from 1.33x to 1.11x. LPs should check when IO ends and whether income will be high enough by then to absorb the jump.

Who Lends to Syndications, and What Each Lender Brings

The lender shapes the loan's rate, term and flexibility, and what happens if the deal struggles. The main sources of syndication debt run roughly from most conservative to most aggressive.

• Life insurance companies. Low leverage, often 65% of value or less, with long fixed-rate terms on high-quality, stabilized properties. They post the lowest delinquency of any major lender group.
• Agency lenders (Fannie Mae and Freddie Mac). The largest source of apartment debt: mostly fixed-rate with floating options, often for 5 to 12 years, non-recourse, with 30-year amortization and optional IO. They require a stabilized property, and prepayment penalties make an early sale or refinance expensive.
• Banks. Fixed or floating, often 3 to 10 years, frequently with recourse, meaning the sponsor personally guarantees part of the loan. Banks can be flexible with borrowers they know.
• CMBS lenders. Loans pooled into commercial mortgage-backed securities, usually fixed-rate for 5 to 10 years and non-recourse. After closing, a servicer bound by the pool's rules manages the loan, which makes modifications slow in a downturn.
• Debt funds and bridge lenders. Floating-rate loans at higher leverage on properties mid-plan, with two- or three-year terms, extension options and a required rate cap. In a recent CRED iQ sample of CRE CLO collateral, 95% of the balance was interest-only for the full term.
• Construction lenders. Usually banks or debt funds, lending in draws as work is completed, often with sponsor completion guarantees. Floating rate is the norm, since fixed-rate lenders want a finished, leased property. Invest Clearly's guide to development investing covers these loans in detail.
• Hard money lenders. Short-term loans, often 6 to 24 months, at high rates plus upfront points, common in fix-and-flip deals. In a syndication, hard money often means the sponsor needed money fast or other lenders said no. Ask which.

Mortgage Bankers Association data on the five largest lender groups, which hold over 80% of commercial mortgage debt, follows the same order. Each group defines delinquency its own way, from 30 days late for CMBS to 90 days for banks, so compare the size of the gaps.

Figure 2. Source: Mortgage Bankers Association, Commercial/Multifamily Mortgage Delinquency Rates, Q2 2026.

Loan Term and Maturity Risk

When a loan comes due, the deal must refinance, sell or extend. If income has lagged the plan or rates are higher than at purchase, the property may be worth less and its income will support a smaller loan payment. A new lender holding the deal to the same DSCR or loan-to-value limit may then lend less than the balance still owed on the old loan. The gap gets filled by an LP capital call, new preferred equity that ranks ahead of existing LPs, or a sale at a loss.

Fixed-rate debt faces the same test. CRED iQ analyzed $136 billion of agency and CMBS apartment loans maturing between October 2026 and December 2028, leaving out floating-rate single-asset CMBS and CRE CLO loans. At current new-loan rates and a 1.25x DSCR, 31% of that balance could not refinance without new equity. For loans made in 2021 and 2022, the share was 57%. The median shortfall was 15% of the loan, about $25,000 per apartment, or roughly $5 million on a 200-unit property.

Bridge loans face this test sooner. Each extension usually requires a minimum DSCR or debt yield, a fee, a new rate cap, and sometimes a paydown. A deal that misses those tests can default at maturity while paying every monthly bill.

The safest structures leave room to run late: a loan that matures a year or two after the planned sale lets a sponsor wait out a weak market. Invest Clearly's look at the 2026 maturity wall covers what to ask a sponsor whose loan is coming due.

Questions to Ask About the Debt Before You Invest

Loan terms appear in the private placement memorandum or financing summary. A sponsor should answer these questions directly, and a vague answer tells you something too.

1. Is the loan fixed or floating? If floating, what is the spread over SOFR?
2. Is there a rate cap? What is the strike, when does it expire, and who pays to replace it?
3. What is the initial term, and what conditions apply to each extension?
4. How long is the interest-only period, and what does cash flow look like after it ends?
5. Who is the lender, and is the loan recourse or non-recourse?
6. How does the planned sale date compare with the loan's final maturity?

The Bottom Line

Syndications get into the deepest trouble when a weak stretch collides with a loan deadline. The loan sets how long a sponsor can wait, how much a rate move costs, and who pays when the numbers come up short. LPs who read the debt terms as closely as the rent projections will see that risk before they commit capital.

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