Definition
Senior debt sits at the base of the capital stack and represents the largest single source of financing in most commercial real estate transactions. It is secured by a first-priority lien (mortgage) on the property, giving the lender the right to foreclose and sell the property to recover their investment if the borrower defaults. Because of this priority position, senior debt carries the lowest interest rate of any capital source in the stack. Senior debt typically represents 55-75% of the property's value, depending on the lender type and property characteristics. Banks, life insurance companies, CMBS lenders, and debt funds are all common senior debt providers. Senior lenders underwrite based on the property's ability to generate income (measured by DSCR), the borrower's creditworthiness, and the property's value relative to the loan amount (measured by LTV). Senior debt can be fixed-rate or floating-rate, interest-only or amortizing, and ranges in term from short-term bridge loans to 30-year permanent financing.
How It Works
A borrower applies for a senior loan, providing information about the property, business plan, and financial capacity. The lender underwrites the deal, evaluating NOI, DSCR, LTV, and sponsor experience. The loan amount is sized to the more conservative constraint (LTV or DSCR). At closing, the lender records a first mortgage lien against the property. The borrower makes monthly payments (interest-only or amortizing) and the lender has the right to foreclose if payments are not made.
Example
A sponsor acquires a $12,000,000 industrial property. A bank provides $8,400,000 in senior debt (70% LTV) at a 6.25% fixed rate with a 10-year term and 30-year amortization. Annual debt service is approximately $620,000. The property generates $800,000 in NOI, resulting in a DSCR of 1.29x. The senior lender has the first claim on the property's income and value.
Why It Matters
Senior debt is the foundation of every capital stack and the least expensive form of real estate capital. The terms of the senior loan — rate, leverage, amortization, and covenants — have a direct and significant impact on the sponsor's returns and the deal's risk profile. Selecting the right senior lender and optimizing senior debt terms is one of the most consequential decisions in any CRE transaction.
H Equities
H Equities provides senior bridge debt from $5MM to $50MM, offering borrowers speed, certainty, and flexible structures for transitional commercial properties. Learn more
Frequently Asked Questions
What is the typical LTV for senior debt?
Senior debt typically ranges from 55% to 75% LTV for conventional loans and up to 75-80% for bridge loans. The exact LTV depends on the property type, market, income profile, and lender type.
What types of lenders provide senior debt?
Banks, life insurance companies, CMBS conduits, agency lenders (Fannie Mae, Freddie Mac for multifamily), and private debt funds all provide senior debt. Each has different appetites for property type, deal size, and risk profile.
What happens if the borrower defaults on senior debt?
The senior lender can foreclose on the property by enforcing their first mortgage lien. The property is typically sold at auction, and the senior lender is repaid first from the proceeds before any subordinate capital providers.
Related Terms
Capital Stack in Real Estate
The layered structure of all capital sources used to finance a real estate investment, arranged from lowest risk (senior debt) to highest risk (common equity).
Mezzanine Debt in Commercial Real Estate
A subordinate loan that sits between senior debt and equity in the capital stack, typically carrying higher interest rates in exchange for filling the financing gap.
Subordinate Debt
Any debt that ranks below senior debt in repayment priority, including mezzanine loans and B-notes, carrying higher interest rates to compensate for greater risk.
Loan-to-Value (LTV) Ratio
The ratio of a loan amount to the appraised value of the property, used by lenders to assess risk. Lower LTV means less risk for the lender.
Bridge Loan in Commercial Real Estate
A short-term loan (typically 6-36 months) used to "bridge" the gap between acquiring or repositioning a property and securing permanent financing.