Money & Finance › Commercial real estate lending › The capital stack: who gets paid first in a property deal
Senior debt: the first-lien mortgage, paid first
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
The first-lien mortgage loan on a property: paid first from rents and sale proceeds, so it is the cheapest money in the deal.
See it on the Money & Finance map →How it works
The senior lender records a first deed of trust, California's usual form of mortgage. Usually only property taxes and tax-lien assessments such as C-PACE rank ahead. Typical size is 55–75% of value, at the lowest rate in the stack. In return the lender controls a lot: approval of big leases, insurance, transfers and any other debt. 'Due-on-sale' and 'due-on-encumbrance' clauses let it call the loan if the owner sells or borrows behind it without consent. Foreclosure by the senior lender wipes out junior liens.
Why it matters
Everything else in the stack is negotiated around it: its terms set how much other money can be layered in and who controls the building in trouble.
Facts, rules and data
Recorded deeds of trust and title insurance establish priority; the Garn–St Germain Act of 1982 made due-on-sale clauses enforceable nationwide.
Connections (4)
▸Senior debt: the first-lien mortgage, paid first sits at the bottom of The capital stack: who gets paid first in a property dealFact, law or data
The connection
Drawn as a tower, the stack puts the senior loan at the base because it is paid first and protected by every layer above it. Those layers absorb losses before the senior lender loses a dollar, which is why senior debt carries the lowest rate.
When and why
In every financed deal; senior loans typically cover 55–75% of value.
How we know
Recorded deeds of trust, title insurance and intercreditor agreements fix the senior lender's first claim.
Debates and risks
A C-PACE tax lien or a ground lease can rank ahead of the 'senior' loan, which surprises some owners and lenders.
▸Mezzanine loans secured by the owner's LLC interests are subordinate to Senior debt: the first-lien mortgage, paid firstFact, law or data
The connection
The mezz lender is paid only after the senior loan's interest and principal. An intercreditor agreement sets the terms: the mezz lender can cure senior defaults, buy the senior loan at par, and foreclose on the LLC interests, but only if it, or a 'qualified transferee', takes over and keeps the senior loan in place.
When and why
Common in large CMBS and bank deals since the late 1990s; standard intercreditor forms date from the 2000s.
How we know
Intercreditor agreements and court decisions on them, including the 2010 fights among Stuyvesant Town's senior and mezzanine lenders.
Debates and risks
Lawyers still argue over when a senior lender can block a mezz foreclosure and what counts as a 'qualified transferee'.
▸Ground leases and leasehold financing usually rank ahead of leasehold Senior debt: the first-lien mortgage, paid firstFact, law or data
The connection
In an unsubordinated ground lease the landowner's rights come first: if the tenant stops paying ground rent, the landowner can end the lease and wipe out the leasehold mortgage. So the leasehold lender demands notice of defaults, cure rights and a new lease if the old one ends. In a rarer subordinated lease, the landowner pledges the land too.
When and why
In ground-leased buildings across the US, including much of Manhattan and Hawaii; Safehold has marketed modern unsubordinated ground leases since 2017.
How we know
Ground lease and leasehold mortgage documents, title insurance policies, and lender requirements published by the agencies and rating firms.
Debates and risks
How lender protections hold up when a ground tenant files bankruptcy and rejects or keeps the lease still produces court disputes.
▸C-PACE: green-upgrade loans repaid on the property-tax bill takes a tax lien that outranks Senior debt: the first-lien mortgage, paid firstFact, law or data
The connection
C-PACE is a special tax assessment, so its unpaid installments share the property-tax lien's priority, ahead of the first mortgage. Only overdue installments, not the whole balance, are senior. Because that would surprise an existing lender, California and most other states require the mortgage lender's written consent before the assessment is placed.
When and why
In states with C-PACE laws, about 40 including California; the consent is usually signed at closing.
How we know
State PACE statutes, county assessment records, and mortgage lenders' consent and acknowledgment agreements.
Debates and risks
How C-PACE liens fare when a building is foreclosed, and whether lenders should refuse consent more often, is still being tested in practice.