Senior Real Estate Loans, Explained: What Lending First Really Means

A senior loan is the first loan on a property, secured by a mortgage. The senior lender is paid before anyone else and, if the borrower defaults, can foreclose and take the property. In exchange for that priority, the return is fixed and capped. For an investor, a senior loan is the most protected position in a real estate deal, but protection depends on how much the property is worth compared with the loan, and on how hard it is to recover the money if something goes wrong.

What you are when you invest

You are a lender. You do not own the building and you do not share in its profits. You receive interest, usually monthly, and your principal back when the loan is repaid, normally at a sale or a refinance.

What protects you

• The mortgage. A recorded lien on the property that comes before every other claim except taxes.
• Loan-to-value. If the loan is 55% of the property's value, the value can fall about 45% before the loan is impaired. A lower ratio means a thicker cushion.
• Debt coverage. On a building that already earns rent, lenders look at how many times the income covers the loan payments. More coverage means more room for a bad year.
• The borrower's equity. Everyone above you, including mezzanine lenders and owners, loses first.

What can go wrong

• A deep fall in value. Rare, but possible in severe downturns or for specialized buildings.
• Construction risk. A construction loan is secured by a building that does not exist yet. If the project stalls, the collateral is a half-finished structure.
• Slow, costly recovery. Foreclosure takes time and legal fees, especially in states where it runs through the courts, as in Florida and New York. Interest may stop while the case runs.
• Capped upside. If the project is a great success, you still receive only the agreed interest.

What the return looks like

Senior loans in private real estate typically pay a fixed or floating rate set at a margin above benchmark rates. Illustratively, private senior loans often target high single digits, around 7% to 9% a year, with construction and bridge loans at the higher end because they carry more risk. Returns come almost entirely from interest, paid on a schedule.

Who it fits

Investors who want income on a schedule, a defined end date and the most protected seat in the deal, and who accept that the best they can earn is the agreed rate.

How we look at it

We read a senior loan from the bottom up: what the property is worth today, what it is worth if things go badly, how fast we could recover, and who stands between us and a loss. A low loan-to-value on a building that does not exist yet can be riskier than a higher one on a building full of tenants. See same position, different risk and how to read a capital stack.

Frequently asked questions

Can a senior lender lose money?

Yes. If the property's value falls below the loan and recovery costs are high, the lender can lose part of its principal.

What is the difference between a senior loan and a mortgage?

The mortgage is the security; the senior loan is the debt it secures. Together they give the lender first claim on the property.

How long does a senior real estate loan last?

Bridge and construction loans usually run one to three years; loans on stabilized buildings can run five to ten.

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, and figures are illustrative ranges, not projections. Any offering is made only through definitive documents and only to accredited investors.