“Optimism arbitrage” is my new favorite term
Across the U.S., a lot of real estate developers did the silliest deals with the rosiest underwriting… and still refuse to acknowledge reality.
They underwrote:
- Aggressive rent growth
- Easy refinances
- Higher exit values
Then rates ripped higher and the world changed.
We’ve been picking off sub‑institutional multifamily properties, but it’s been hard to transact, because when the best‑case scenario is someone’s base case, their price expectations are still too high.
One of our partners found the unlock:
Instead of trying to buy from them, sell them expensive capital.
We provide short‑term, higher‑yield preferred equity to these developers in a tax‑efficient way.
From their perspective:
- They don’t want to sell at today’s prices
- They believe their rents and values are coming back fast
- So they’re willing to take expensive financing for 12–24 months to “hang on” and try to monetize that recovery
From our perspective:
- We’re underwriting their optimism, not sharing it
- We get paid well while still having roughly a 15–25% cushion between our position and today’s value
- We can structure it so the cash flow is still shielded by depreciation, making it tax-free
That gap between their optimism and our terms is what I mean by “optimism arbitrage.”
It’s one of the most attractive after‑tax, risk‑adjusted opportunities I’ve seen in the last couple of years.