The Complete Guide to CRE Loan Stacking: Senior, Mezz, Pref, and Equity

Every dollar in a commercial real estate transaction comes from somewhere, and those dollars are not created equal. The capital stack is the hierarchy that determines which investor gets paid first, which carries the most risk, and which earns the highest return. Optimizing the capital stack — squeezing maximum leverage from the cheapest capital before moving to more expensive layers — is one of the highest-leverage skills in commercial real estate finance.

Layer 1: Senior Debt (The Cheapest Capital)

Senior debt sits at the top of the repayment priority and the bottom of the return hierarchy. Because senior lenders are repaid first — from operating cash flow and in any liquidation — they accept the lowest interest rate. For a typical stabilized hotel or multifamily property, senior debt might carry an all-in rate of 6.0–7.5% (CMBS fixed) or SOFR + 300–400 bps (bridge). Senior debt typically covers 60–75% of property value or total cost.

Types of senior debt: CMBS conduit (non-recourse, 10-year fixed), bank debt (recourse, 3–7 year term), SBA 504/7(a) (owner-occupied, government-guaranteed), USDA B&I (rural markets, 80% guarantee), and agency multifamily (Fannie/Freddie/HUD for apartments).

Layer 2: Mezzanine Debt (Expensive and Powerful)

Mezzanine debt fills the gap above the senior loan's maximum leverage. It is secured by a pledge of ownership interests (not the property itself) and priced at 9–14% in the current market. Because mezz lenders have real enforcement rights (UCC Article 9 foreclosure), they accept lower returns than preferred equity — but still far above senior debt rates. Mezz is most common in large development deals, recapitalizations, and transactions where the sponsor needs leverage above 75% of cost.

Layer 3: Preferred Equity (Flexible Gap Filler)

Preferred equity occupies the same economic position as mezzanine — between senior debt and common equity — but is structured as an equity interest rather than debt. Preferred equity is priced at 10–16%, reflecting its weaker enforcement rights relative to mezz. Its key advantage: CMBS compatibility. Unlike mezzanine, preferred equity generally does not require an intercreditor agreement with the CMBS servicer, making it the go-to gap filler for CMBS-financed properties.

Layer 4: Common Equity (Highest Risk, Highest Return)

Common equity is the sponsor's own investment — and the last to be repaid. It absorbs losses first and receives profits last (after all senior capital is returned). Return expectations for common equity typically run 15–25% IRR depending on deal risk, hold period, and market. The sponsor's equity contribution signals alignment — most senior lenders require 20–35% of total cost from common equity to ensure the borrower has meaningful downside exposure.

Sample Capital Stack: $20M Hotel Acquisition

Layer	Amount	% of Cost	Rate
CMBS Senior Debt	$13.0M	65%	6.85% fixed
Preferred Equity	$3.0M	15%	12.0% preferred return
Common Equity (Sponsor)	$4.0M	20%	Target 18% IRR
Total	$20.0M	100%	WACC ~8.4%

First Realty Capital structures complete capital stacks for hotels, multifamily, office, and industrial assets — from senior CMBS to preferred equity placements. Request a capital stack analysis for your next deal.