How can a multifamily office evaluate securities-based lending and other borrowing strategies?
Start with the purpose of the borrowing, then compare total cost, collateral rules, repayment capacity, and downside scenarios. Securities-based lines can provide liquidity without selling investments, but falling collateral values can trigger a maintenance call or forced sale. Compare them with mortgages, private credit, margin loans, and cash before choosing a structure.
Define the need and compare the right alternatives
Write down the use of funds, expected timing, desired repayment source, and maximum acceptable payment. A short bridge for a property purchase has different requirements from a long-term distribution facility or a loan to fund a business investment.
Request comparable term sheets. Review the interest rate formula, spread, fees, minimum usage, maturity, amortization, prepayment terms, covenants, reporting duties, and lender remedies. Calculate the annual cash cost under several rate assumptions. Include commitment fees and any costs for moving or pledging assets.
Compare a securities-backed line with a mortgage, commercial loan, margin loan, private credit facility, or an internal family loan. The lowest quoted rate may not be the lowest total cost after fees, collateral restrictions, and refinancing risk.
Stress the collateral and repayment plan
For a securities-backed line, identify eligible securities, advance rates, concentration limits, and the lender's right to change eligibility. The SEC explains that a falling portfolio value can lead to a maintenance call, requiring additional collateral or repayment, often within a short period. The firm may also sell pledged securities. SEC Investor Alert
Model a sharp market decline, a higher interest rate, an illiquid holding, and a simultaneous cash need. Set internal limits below the lender's maximum and keep a separate liquidity reserve. Do not rely on selling the same collateral that supports the loan. Test whether distributions, operating cash flow, or other liquid assets can repay debt without a forced sale.
When any investor looks at any deal or opportunity, they're instantly evaluating a couple of things. They're thinking, who is this person? Are they credible? Is this gonna go well for me? What's the downside protection? What's the collateral? What's the structure? And then what is the upside?
Document tax, governance, and lender terms
Trace every use of loan proceeds. The IRS says interest allocation follows how borrowed funds are used, and investment interest deductions are subject to limits. IRS Publication 550
Have the investment committee approve the purpose, leverage limit, collateral mix, stress tests, and reporting schedule. Record who can draw funds and who can authorize changes. Review lender credit quality, custody arrangements, data access, default provisions, and dispute procedures. Reassess the facility after major portfolio, ownership, or cash flow changes. This process supports disciplined borrowing without treating available credit as required spending.
Related guides
- Access to Alternatives Through an MFO: A Practical Guide for Families
- Cross-Border Families and Multifamily Offices: A Practical Guide
- Family Governance With a Multifamily Office