
Private debt
Key Takeaways
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Private Debt
Real estate private debt refers to non-bank lending to property owners and developers, typically funded by pooled investor capital. It includes both direct lending between non-bank lenders and real estate stakeholders as well as purchasing of securitized debt instruments.
Capital stack
​A capital stack represents the mix of financing sources to fund a real estate or investment project, including both debt and equity. Understanding the capital stack is essential for investors and lenders, as it helps evaluate the project’s risk-return profile, guide financing decisions, and ensure that capital is allocated efficiently.
Main Drivers
Maturing loans, pullback from traditional lenders, and the higher-for-longer interest rate regime are the main secular drivers for the sector.
What is Private Debt?
Private debt involves direct lending between borrowers and non-bank lenders such as private equity firms, credit funds, or institutional investors, as well as acquiring securitized debt. Unlike traditional lenders, such as Banks and Thrifts, that comprise nearly 38% of the outstanding commercial and multifamily mortgages, real estate debt funds pool capital from investors to carry out such investment activities.i
At the core of private real estate debt is commercial loan—a financial arrangement where a property owner or developer borrows money from a lender to fund commercial real estate properties. Typically, the property serves as collateral for the loan in case the borrower defaults on the loan. In some cases, additional recourse from a borrower is required by the lender to secure the loan.
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Composition of Owners of US Commercial and Multifamily Mortgages as of Q3 2024 ii

Key terms used in the sector​
Loan Amount and Terms
Loan Proceeds are determined based on factors such as the property's value, the borrower's creditworthiness, and the property’s financial statements. Loan terms include the principal amount, interest rate, repayment period, and any other specific conditions agreed upon between the borrower and lender.
Loan-to-Value (LTV) Ratio
LTV compares the loan amount to the appraised value of the property at origination. A lower LTV ratio indicates a lower risk for the lender. Commercial real estate LTVs typically range from less than a third to two-thirds of the capital stack. LTVs do not assume the value of planned capital improvements.
Interest Rates
Commercial real estate loans may have fixed or variable interest rates. Fixed-rate loans maintain a constant interest rate throughout the loan term, providing predictable payments. Variable-rate loans have interest rates that are tied to a reference rate, such as Prime Rate or Secured Overnight Financing Rate (“SOFR”) which adjust periodically based on market conditions.
Loan Covenants
Lenders may include loan covenants, which are conditions or restrictions that borrowers must adhere to during the loan term. These may relate to financial performance, property management, or other factors. Covenants are not uniform and vary by lender, property, and identified risk factors.
Who are the borrowers of private debt?
Real estate owners and developers are the primary borrowers of private real estate debt to secure financing for property development or operational needs. The use of loan proceeds can range from property acquisitions, construction activities, or in some cases capital improvements. Loans can take on different forms, and one may invest in direct and/or conduit structures. Unlike conventional lenders, private debt can be tailored to specific project requirements without being subject to the same regulatory constraints as traditional lenders.
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What are the secular drivers for the sector?
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Pullback from traditional lenders: The demand drivers for private debt are influenced by evolving regulatory changes in the commercial banking sector. Recent proposed regulations are likely to reduce the availability of capital from conventional bank lenders, which will drive demand to other non-bank institutions including private debt funds.
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Maturing loans: over $1.3 trillion in commercial real estate loans is scheduled to mature in 2025 and 2026, of which nearly 33% are multifamily loans.iii Amid tighter credit conditions, which generally refers to higher interest rate environment with stricter covenants, private lenders and other non-bank lenders are likely to have access to a broader pool of high-quality borrowers.
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Higher-for-longer interest rate regime: Tight credit conditions coupled with near-term loan maturities facing a higher interested rate environment may result in non-bank lenders’ capacity to provide flexible loan vehicles structures that allow for recapturing asset value through moderate capital market dislocation.
Examples of Capital Stack in Commercial Real Estate Financing

What are the Common Subclasses?
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Senior Debt: Senior secured loans involve lending money to a real estate project with the property serving as collateral. These loans have the highest priority in case of default, providing a lower-risk profile compared to other debt instruments.
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Mezzanine Debt: Mezzanine debt represents a subordinated loan that sits between senior debt and equity in the capital stack. It typically has a higher risk and return profile for lenders and their investors.
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Preferred Equity: Preferred equity involves an ownership stake in a property with preferential treatment in terms of cash flow distribution and proceeds during a sale. It combines elements of debt and equity, providing a balance of risk and returns.
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Securitized Products: Structured debt products such as Commercial Mortgage-Backed Securities (“CMBS”), Commercial Real Estate Collateralized Loan Obligations (“CRE CLO”), etc. are financial instruments that pool commercial real estate loans. Lenders typically bundle loans to create securities with tranches based on levels of risks. These are then traded in secondary markets where investors purchase portions of these securities, receiving income from the underlying mortgages and exposure to diversified pool of commercial real estate assets. The performance of the asset class is influenced by factors like property values, rental income, and economic conditions. Single Asset Single Borrower (“SASB”) CMBS are a variation of this structure where a single property serves as the collateral for a securitized investment product.
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