Looking to grow through CRE debt financing US, but unsure where to start? Commercial real estate debt has many tiers—from traditional bank loans to mezzanine loans and private credit structures. Let’s break it all down in down-to-earth language.
1. Understanding the CRE Debt Stack
When buying or refinancing commercial property, financing is built like a sandwich:
A. Senior Debt (Bank or Agency Loans)
- First lien with lowest interest rate (5–8%).
- Covers 50–70% of the loan-to-value (LTV) typically.
- Comes with strict underwriting and amortization .
B. Mezzanine Loans
- A hybrid between debt and equity—subordinate, unsecured, can convert to equity if you default.
- Catches the gap beyond senior debt—boosting total LTV to 80–90% .
- Typically interest-only, with terms of 3–7 years and interest rates around 9–20% .
C. Preferred Equity / NAV Loans / Private Credit
- Go beyond mezzanine for more leverage or flexibility when banks say no (Essex Capital Markets).
- Often used by funds or sponsors for quick bridge or recapitalization .
2. Why Leverage Mezzanine Loans?
Bridge Capital Gaps
Use when senior debt and equity don’t cover project needs—for development, acquisitions, reversals .
Increase Returns
Higher leverage boosts cash-on-cash and IRR—while keeping equity stake intact .
Flexible & Fast
Often interest-only, short-term, and quicker to close than equity financing.
3. Mezzanine Financing: Pros & Cons
Pros:
- Higher leverage—extend LTV up to 90%.
- Interest-only keeps payments low during the project.
- Less equity dilution—no full equity stake given away.
- Speedier execution once approved .
Cons:
- High interest (9–20%).
- Often includes equity conversion rights or “kickers.”
- If defaulting, lenders can convert into equity ownership .
- Possible prepayment penalties and covenants .
4. The Bigger Change: Private Credit & Non-Bank Channels
Why private credit is booming:
- Banks have tightened CRE lending—loan growth slowed and volumes are at lows .
- Non-bank/private lenders (Blackstone, BlackRock, Ares) now provide up to 75% LTV, filling the funding gap.
Risks and rewards:
- Offers speed, flexibility, and higher leverage—but at higher rates and less oversight.
- Moody’s warns of systemic risks tied to non-bank loan growth.
5. Best Practices for Smart Structuring
- Start with senior debt up to 65% LTV from traditional sources—banks or CMBS.
- Fill gaps with mezzanine or private credit, but stress test with interest rates and default scenarios.
- Negotiate equity kicker terms carefully—equity conversion shouldn’t happen too easily.
- Keep loan terms aligned—harmonize senior and mezzanine loan durations.
- Plan exit strategies—refinancing, sale, or paydowns ahead of maturity.
In commercial real estate, “smart leverage” means using structured capital—not just piling on debt count.
6. Real‑World Example
Let’s say a developer purchases a new industrial warehouse for $20 million. Bank agrees to $13M (65% LTV) at 6%. To complete the deal, a $4M mezzanine loan at 12% is taken. The developer injects $3M equity, ending the deal with 85% total leverage.
If the warehouse value stabilizes, refinancing senior debt lowers overall interest costs and frees up capital for other projects. Alternatively, at maturity, the developer may convert the mezzanine loan into equity if unable to refinance.
7. CRE Debt Outlook in 2025
- CRE lending is expected to rebound, with 68% of respondents in a Deloitte survey anticipating better capital availability in 2025 .
- CRE debt maturities rise: nearly $1T of maturing loans in 2025 puts refinancing and structuring in focus .
- Creative structures are trending, with mezzanine, preferred equity, and bridge lending gaining traction.
Final Takeaway
Navigating CRE debt financing US hinges on matching your capital stack with your project goals and risk appetite. While mezzanine loans bring leverage and flexibility, they cost more and carry higher risk. And with banks pulling back, private-credit lenders are stepping in—bringing innovation, liquidity, and complexity.
If you’re looking to structure CRE financing in 2025, I can connect you with experts in mezzanine lending, bridge financing, or private credit sourcing to build a stack that works for your strategy.