Senior debt, mezz, preferred equity — what each costs

Every hotel acquisition is financed with a capital stack: layers of capital with different risk, different cost, and different control rights. The operator who walks into an ownership conversation knowing only "we have a mortgage" is the operator who gets surprised when the mezz lender forces a reorganization or the preferred equity holder pulls the distribution. The stack matters.

Senior debt: 55-65% LTV, the cheapest layer

Senior debt is the first claim on cash flow and the first claim on the asset in a default. For that priority, the lender accepts the lowest return — currently 5.5-7.0% all-in for European hotel CMBS-style senior debt, 6.0-8.0% for bank balance-sheet lenders, depending on credit and market. Loan-to-value typically 55-65% on stabilized assets, 50-58% on value-add.

Active senior lenders in European hotels as of 2026: Aareal Bank, Deutsche Pfandbriefbank, Berlin Hyp, ING, BNP Paribas Real Estate, Crédit Agricole CIB. CMBS-style: Goldman Sachs, Morgan Stanley, Citi (for the larger deals, €100M+). All of them publish term-sheet templates; getting one of those templates 12-18 months before a refinance is the single most useful early-stage research.

Mezzanine: 10-25% of stack, the middle layer

Mezz sits between senior debt and equity. It is paid after senior but before equity. Mezz can be structured as a second-lien loan (cash pay), a preferred equity (cash pay or accrued), or a hybrid. Pricing: 9-13% for second-lien mezz, 11-15% for preferred-equity mezz (the higher rate reflects the deeper subordination).

Mezz lenders in European hotels: Cheyne Capital, Fortress Investment Group, Tristan Capital, Blackstone Real Estate Debt Strategies, Pimco Real Estate. They each have a sweet spot — Cheyne does €15-50M tickets, Tristan does €25-100M, Blackstone does €50M+. Knowing the ticket size determines who you call first.

Preferred equity: 5-15% of stack, the equity-flavored layer

Preferred equity is structurally equity but contractually senior to common equity. It accrues a preferred return (typically 8-12%) that compounds until paid, and it can have liquidation preference (gets its capital back before common equity in a sale). Some pref structures convert to common equity over time; some have put rights.

When the deal calls for a tighter LTV cap on senior debt — say 55% in a tougher credit market — preferred equity fills the gap. The math: a deal that needs €80M of capital total, where senior covers €44M (55%) and common equity is €25M, has a €11M gap. That gap gets filled by mezz, preferred equity, or some blend. The choice depends on which buyer's capital structure can accommodate the cost.

Common equity: 20-35% of stack, the riskiest and most expensive

Common equity is what everyone calls "the equity." It is last in line for cash flow, last in line in a default, and entitled to the upside above all the other layers. Equity IRR targets vary by strategy: 10-13% for stabilized institutional equity (BlackRock, Aviva, Allianz Real Estate); 15-20% for value-add (Henderson Park, Mount Kellett, Archer Hotel Capital); 20%+ for opportunistic (KKR Real Estate, Blackstone opportunistic, Apollo).

The weighted average cost of capital is what matters in the diligence conversation. If senior is 6.5% at 60% LTV, mezz is 12% at 10%, common equity is 18% at 30%, the blended WACC is 9.9%. That is the discount rate the buyer is solving for — not the IRR they show you on the equity slide.