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In a simple commercial property capital stack, common equity takes the first fall in value, mezzanine debt takes the next loss and the senior mortgage is reached last. That order follows claim priority, but each lender’s security and remedies also matter. Underwriting asks whether the property value and income leave enough cushion for the promised debt.
Read the stack from the bottom
Common equity receives what remains after debt claims and has no fixed repayment ahead of lenders. A mezzanine lender sits above common equity but below the mortgage lender. The senior mortgage generally has a direct charge over the property; mezzanine finance is commonly backed by a pledge over an ownership interest rather than a second charge on the building. An SEC filing describing property loan classes sets out that ranking and security distinction. CAIA Association includes real estate equity and debt investing among its real estate subjects.
An illustrative loss waterfall
Assume an invented property worth £10 million, funded with a £6 million senior mortgage, £2 million of mezzanine debt and £2 million of common equity. Ignore interest, costs, taxes and legal complications so the example isolates priority. If the property can be realised for £7 million, pay the senior claim first. It receives £6 million; the remaining £1 million goes to mezzanine; common equity receives nothing. Against the initial stack, the £3 million value fall has erased £2 million of equity and £1 million of mezzanine principal.
| Senior mortgage | £6 million | £6 million | £0 |
| Mezzanine debt | £2 million | £1 million | £1 million |
| Common equity | £2 million | £0 | £2 million |
The order of payments is the point, not a forecast of actual recovery. A real workout depends on documents, enforcement, expenses and the amount realised. Do not infer that a mezzanine lender holds a property mortgage merely because its claim ranks above equity.
Connect the stack to underwriting
A lender also asks whether the initial loan is supported by collateral value and operating income. Loan-to-value compares the mortgage loan with the property value. Debt service coverage compares net operating income with scheduled principal and interest payments. For the illustrative senior mortgage, the initial loan-to-value is £6 million divided by £10 million, or 60%; after the value fall, if the loan balance is unchanged, it is £6 million divided by £7 million, or about 85.7%. The ratio worsens even before any payment is missed.
Do not combine mezzanine and senior balances silently when a question specifically asks for the mortgage LTV; state the numerator you use. Nor should a healthy property value be taken as proof of adequate income to service debt. The CAIA programme page provides programme context, and Omni’s methodology explains its study approach.
Sources
- Real Estate Microcredential · caia.org · Retrieved
- Registration Statement on Form N-2 · sec.gov · Retrieved
