Financing a partner buyout

The decision

You need to fund the departing partner’s share without overloading the property or giving up the loan you already have. The order of operations matters: agree on value and terms with your partner, check what your current loan allows, then pick the cheapest capital that fills the check.

The funding options, ranked for a typical buyout

Rank	Option	Wins when	Loses when
1	Supplemental loan behind the existing agency loan	Current loan has a low rate and years left	First loan is too new or too close to maturity
2	Full refinance with cash out	Current loan is near maturity or expensive	Prepayment premium is large; today’s rate is far above the old one
3	Note to the departing partner	Partner will take payments over time	Partner needs cash now; senior lender bars the note
4	Preferred equity	Large gap, property can carry it	Cost and control rights
5	Mezzanine loan	Larger deals with a senior lender that permits it	Small loans; senior lender will not allow it
6	Sale of the property	Partners cannot agree on value or terms	Tax and transaction costs

Supplemental limits come from the agencies’ term sheets: Fannie Mae supplemental loans go as high as 70% LTV, depending on asset class and use of proceeds¹ at as low as 1.30x¹ coverage, and they are available 12 months after the senior loan closes. Freddie Mac allows 80% combined LTV at 1.25x (7-year term)², with timing limits: at least 12 months after the first loan; not in its last 3 years².

Worked example: two ways to fund the same buyout

Illustration. Two partners own a $10,000,000 apartment building 50/50, with $750,000 of NOI and a $5,500,000 agency loan at 3.90%. Equity is $4,500,000, so the departing partner’s half is $2,250,000 before any negotiated discount.

Line (illustration)	Full refinance at 6.50%	Supplemental at 7.00%
New money raised	$2,000,000 (loan to $7,500,000, 75% LTV)	$1,500,000 (combined $7,000,000, 70%)
Less prepayment on the old loan	about $55,000 (a 1% minimum)	none, old loan stays
Less closing costs (illustrative 2% of the new loan)	about $150,000 on the whole loan	about $30,000
Net to the buyout	about $1,795,000	about $1,470,000
Shortfall against $2,250,000	about $455,000	about $780,000
Annual debt service after	about $569,000	about $431,000
Coverage after	about 1.32x	about 1.74x
Blended rate	6.50%	about 4.56%

The refinance raises more cash but costs about $138,000 a year more in debt service. The supplemental keeps the 3.90% loan and leaves a bigger shortfall, which the remaining partner can fill with cash, a note to the departing partner, or a small preferred equity piece. A note of $780,000 paid over a few years is often cheaper than refinancing a low-rate loan.

Why is the prepayment only the minimum? When Treasury yields are above the old note rate, yield maintenance falls to the documents’ floor, at Fannie Mae a minimum premium of 1% of the balance³. The 10-year Treasury was 4.94% (October 30, 2026)⁴. Confirm with the prepayment penalty calculator.

What the lender will check

• Transfer consent. The servicer reviews the new ownership, the remaining principals and any new investors.
• Guarantor replacement. If the departing partner was a guarantor, the remaining sponsor must replace that strength.
• Valuation. A new appraisal. Your partnership’s agreed value does not bind the lender.
• Use of proceeds. Buyout cash leaves the property, so lenders apply their cash-out rules.
• Subordinate debt. Many senior loans bar a second mortgage, and some bar mezzanine debt or require consent to the preferred equity terms. Freddie Mac Conventional Small, for example: Excludes student, seniors, MHC and co-op properties; no hard subordinate debt⁵.

Timeline and documents

• The partnership or operating agreement, especially the buy-sell and valuation clauses.
• A signed term sheet between the partners: price, payment terms and closing date.
• The current loan documents, including transfer, assumption and prepayment sections.
• Rent roll, trailing operating statements and a recent appraisal if you have one.
• Financial statements for the remaining partner and any new guarantor or investor.

Transfer reviews and supplemental loans each run through the servicer and lender review process, so set the closing date with your partner after you have the lender’s timeline, not before.

Pitfalls

1. Agreeing on a price before checking the loan. The loan may make one structure far cheaper than another.
2. Skipping lender consent. A transfer without consent can trigger default and, on non-recourse loans, full recourse.
3. Overleveraging the property to pay a partner. Check coverage at the new debt level and leave reserves.
4. Forgetting the departing partner’s guarantee. Lenders do not release a guarantor without a replacement.
5. Ignoring taxes. The departing partner’s tax on the sale and any step-up for the remaining partner depend on the structure. Bring tax advisers in early.