Senior debt is the first-lien loan at the base of the commercial real estate capital stack. It holds the top repayment priority, gets paid before all other capital, and is secured by a first mortgage on the property. Because it carries the lowest risk, it also carries the lowest cost of any layer in the stack.
How Does Senior Debt Work?
Senior debt works by holding first position for both repayment and collateral. The lender records a first-lien mortgage, so if the borrower defaults, the senior lender is repaid from the property before any mezzanine lender, preferred equity holder, or common equity investor sees a dollar. That priority is why senior debt prices cheapest and sizes largest.
Per Northmarq and GowerCrowd, senior debt typically makes up 50% to 70% of the capital stack and targets returns in a range of roughly 5% to 8%, well below the deeper layers. Payment priority runs top to bottom: senior debt is paid first and is last to absorb losses, while common equity is paid last and is first to take the loss.
Feature | Representative treatment (2026) |
Position in stack | Base, first lien |
Typical size | 50% to 70% of total capitalization |
Return range | Roughly 5% to 8% |
Repayment priority | Paid first, last to absorb loss |
Collateral | First mortgage on the property |
Per CBRE research cited by industry lenders, senior lenders in 2026 commonly cap loan-to-value near 65% for stabilized assets, down from the 75% to 80% seen before 2022. A weaker debt service coverage ratio, under 1.20x, or visible asset risk pushes that cap lower, into the 55% to 65% range, which forces the sponsor to fund the remaining capital from more expensive layers.
Why Senior Debt Matters
Senior debt matters because it is the cheapest capital in the deal and it sets the size of everything above it. If a senior lender funds 60% of the capitalization at a 6% rate, the sponsor only needs to raise the remaining 40% from preferred and common equity that cost far more. Every point of senior leverage the lender allows is a point the sponsor does not fund at 12% or higher.
Per GowerCrowd, senior debt targets a 5% to 8% return while common equity targets 15% to 25%, so the spread between the two is the reason leverage lifts equity returns when a deal performs. The same first-lien priority that makes senior debt cheap also makes it unforgiving: the senior lender is repaid in full before equity recovers anything, so overleveraging turns a modest value decline into a wipeout of the equity below it.
The quotable point for an operator: senior debt is the cheapest money in the stack precisely because it is the last to lose, so its priority is a discipline, not a discount.
Example
A sponsor capitalizes a $10,000,000 acquisition. A senior lender provides first-lien debt at 60% loan-to-value, or $6,000,000, at a 6% rate. Preferred equity funds $1,500,000 and common equity funds $2,500,000. The table shows the stack and repayment order.
Layer | Amount | Share | Repayment order |
Senior debt | $6,000,000 | 60% | 1st, paid first |
Preferred equity | $1,500,000 | 15% | 2nd |
Common equity | $2,500,000 | 25% | 3rd, paid last |
Annual senior interest is 6% of $6,000,000, or $360,000. Suppose the property later sells for $8,000,000, a 20% decline. The senior lender is repaid its full $6,000,000 first. The remaining $2,000,000 goes to preferred equity, which recovers its $1,500,000, leaving $500,000. Common equity, which invested $2,500,000, recovers only $500,000 and absorbs the entire $2,000,000 loss. Senior debt is untouched, which is the priority the 6% rate buys.
Variations and Edge Cases
Senior debt is not uniform: lender type, recourse, and rate structure shift its terms and its cost. The same first-lien loan can carry very different covenants depending on who originates it. The table below covers the variants an operator should confirm before signing a term sheet.
Variant | Treatment |
Fixed vs floating | Life company and CMBS loans often fix the rate; bank and bridge loans often float |
Recourse vs non-recourse | Non-recourse loans price higher but shield the sponsor personally |
Amortizing vs interest-only | Interest-only preserves cash but leaves a larger balloon at maturity |
Lender type | Banks, life companies, agencies, and CMBS conduits price and cap leverage differently |
Covenant package | Debt service coverage and debt yield minimums vary and can trap distributions |
The most common mistake is stretching senior leverage to the maximum a lender will allow. A 75% loan-to-value senior loan leaves a thin equity cushion, so a small drop in value can push the property underwater and eliminate any recovery for the layers above it. Prudent sponsors size senior debt to survive a downturn, not to minimize the equity check.
Senior Debt vs Mezzanine Debt
Senior debt is often confused with mezzanine debt, and both are loans, but they occupy opposite ends of the debt tranche. Senior debt is a first-lien loan secured by a mortgage on the property, paid first and priced lowest. Mezzanine debt is a subordinate loan, usually secured by a pledge of ownership interests, paid after senior debt and priced higher.
The practical difference is collateral and priority. A senior lender can foreclose on the property itself and is repaid before anyone else. A mezzanine lender sits behind the senior loan, forecloses only on the ownership pledge, and accepts more risk for a higher return, typically in the 10% to 15% range against senior debt's 5% to 8%.
Frequently Asked Questions
What is senior debt in commercial real estate?Senior debt in commercial real estate is the first-lien loan at the base of the capital stack, secured by a first mortgage on the property. It holds top repayment priority, is paid before all other capital, and carries the lowest cost, typically a 5% to 8% return, because it is last to absorb losses.
What loan-to-value does senior debt allow?Senior lenders in 2026 commonly cap loan-to-value near 65% for stabilized assets, down from 75% to 80% before 2022. Weaker debt service coverage under 1.20x or visible asset risk can push that cap into the 55% to 65% range, forcing the sponsor to fund the rest from more expensive capital.
Why is senior debt cheaper than other capital?Senior debt is cheaper because it holds first-lien priority and is the last layer to absorb a loss. If a property declines in value or defaults, the senior lender is repaid in full before mezzanine debt, preferred equity, or common equity recovers anything, so it takes the least risk and charges the lowest return.
Related Terms
Preferred Equity
Permanent Loan
Loan to Value Ratio
Debt Service Coverage Ratio
Debt Yield