When a Real Estate Deal Goes Wrong: Who Gets Paid, and in What Order

When a real estate project runs into trouble, cash is paid in the same order as the capital stack: senior lender first, then mezzanine, then preferred equity, then common equity. But the order is only half of it. What matters just as much is what each layer is allowed to do, and how fast. Senior lenders can foreclose, mezzanine lenders can take over the ownership company, preferred investors rely on contract rights, and common owners mostly wait.

How trouble usually starts

• Construction costs rise or the project runs late.
• Lease-up or sales are slower than planned.
• Interest rates rise and the refinance no longer covers the loan.
• A loan matures and the market is not ready for a sale.

Most problems start as a cash-flow gap, not a collapse. The first months decide a lot.

What each layer can do

• Senior lender. Can declare a default, negotiate an extension or modification, or foreclose on the property. In judicial-foreclosure states such as Florida and New York, that can take a year or more.
• Mezzanine lender. Can cure the senior default to protect its position, and can take over the company that owns the building through a commercial-law (UCC) sale, often in weeks rather than months. Taking over means taking on the senior loan.
• Preferred equity. Can use the rights in the operating agreement: replace the manager, force a sale, or convert unpaid returns into more control. Without those rights, it can only negotiate.
• Common equity. Usually has the fewest tools. It can put in more money, often on worse terms, or accept dilution or loss.

Workouts are more common than foreclosures

Most troubled projects end in a negotiation, not a courtroom. Lenders extend maturities in exchange for fees or paydowns. New money comes in as rescue capital, usually as preferred equity that jumps ahead of the existing owners. Existing owners are diluted, but the project survives. The order of the stack decides who has leverage in that negotiation.

Where each layer tends to end up

In a hypothetical $100 million building that ends up worth $65 million: the senior loan of $55 million is repaid in full, the mezzanine lender recovers $10 million of $15 million, and preferred and common equity lose everything. Costs of the process come out first and can widen the losses.

How we look at it

We read the remedies before the rate. For every position we present, we ask what we could do if payments stopped, how long it would take, and what it would cost. A slightly lower return with clear, fast rights is often the better investment. See preferred equity and mezzanine debt for how those rights are written.

Frequently asked questions

Who gets paid first if a project is sold at a loss?

After sale costs, the senior lender, then the mezzanine lender, then preferred equity, then common equity, unless documents say otherwise.

What is rescue capital?

New money that enters a troubled project, usually with priority over existing owners, in exchange for a higher return.

Infinity⁹ (Infinity Capital Asset Management, LLC) is an Exempt Reporting Adviser with the SEC, CRD# 330526. This article is educational and does not constitute legal, tax or investment advice, or an offer to sell or a solicitation of an offer to buy any security. Examples are hypothetical and simplified. Legal remedies vary by state and by document; consult a lawyer. Any offering is made only through definitive documents and only to accredited investors.