… “Stacking the Deck: in Commercial Mortgages”
If you’ve ever peeked behind the curtain of a big commercial real estate deal, you’ll notice that not all money is created equal. Some lenders get paid first. Others wait their turn. And some—well, they’re betting on the upside but taking on a bit more risk to get there.
That’s where A/B/C subordination comes into play. It’s how commercial mortgage lenders and investors organize the “capital stack”—the hierarchy of who gets paid when things go right (or wrong).
You’ll often see this in complex financings like multi-phase developments, mixed-use projects, or large portfolios. But understanding how it works gives you a massive edge as an investor, realtor, or developer.
Let’s walk through what A/B/C subordination means, how it works in practice, and why it matters more than most people realize when structuring commercial financing.
Topics I’ll Uncover
What Subordination Means in Commercial Lending
Breaking Down the A/B/C Structure
A Real-World Story: The Tower That Almost Collapsed (Financially, Not Literally)
How Realtors and Clients Can Use This Knowledge
What Subordination Means in Commercial Lending
In commercial real estate, subordination simply means the order of repayment priority—who gets paid first, second, and third if money becomes tight.
The concept is fundamental to every large-scale loan. When multiple lenders or investors contribute to the same project, not everyone can stand in the same spot at the front of the line. Someone must take the senior position, and someone must stand behind them.
That’s where we get the A/B/C structure—a tiered system that defines repayment order, risk exposure, and expected return.
Breaking Down the A/B/C Structure
Think of the capital stack like a wedding cake. The bottom tier supports everything else—it’s the most stable, but it also gets the smallest slice of icing. The higher you go, the thinner the layer and the sweeter (but riskier) the reward.
Here’s how that translates into lending terms:
- A-Tranche (Senior Debt):
This is the safest, most secure slice. The senior lender—often a bank, credit union, or life insurance company—has first claim on the property’s income and collateral. Because their risk is lowest, they charge the lowest interest rate. - B-Tranche (Mezzanine or Subordinated Debt):
This layer comes after the A-lender gets paid. It carries more risk but also pays a higher return. The B-lender often secures their interest through a pledge of shares rather than a mortgage, and they usually sign a standstill agreement to coordinate enforcement rights with the A-lender. - C-Tranche (Equity or Preferred Equity):
This is the riskiest and highest-return layer. It’s typically made up of investor capital or preferred equity partners. They’re last to be paid but can share in the profits once the project stabilizes or is sold.
How Each Tranche Works
Here’s a practical example.
Imagine you’re developing a $20 million commercial project. The financing could look like this:
- A-Tranche (Senior Mortgage): $12 million from a bank at 6% interest.
- B-Tranche (Mezzanine Loan): $5 million from a private lender at 12% interest.
- C-Tranche (Equity): $3 million from investors in exchange for a share of the profits.
The order of payment priority looks like this:
- The bank (A-lender) gets paid first, always.
- The mezzanine lender (B-lender) gets paid next.
- The investors (C-layer) get whatever remains after the debt is serviced.
If things go sideways—say, rents fall short or the property sells at a loss—the A-lender still gets repaid from the sale proceeds first. The B-lender might get part of their money back. The C-investors? They might get none.
That’s the essence of subordination: more risk, more reward the further down the stack you go.
Why Lenders Use Subordination
Subordination isn’t just a technical structure—it’s a tool to balance risk, encourage participation, and make complex projects possible.
Lenders use it to:
- Attract multiple funding sources for large deals without overexposing any single lender.
- Align risk with reward, ensuring everyone’s compensation matches their level of exposure.
- Enable flexibility, allowing developers to layer financing creatively to meet budget requirements.
- Appease senior lenders, who won’t share priority unless there’s a clear, enforceable hierarchy in place.
From a borrower’s standpoint, subordination allows you to access more total capital than a single senior lender would ever offer on their own.
Yes, it adds complexity—but it can make the difference between a deal that’s underfunded and one that’s fully financed and moving forward.
A Real-World Story: The Tower That Almost Collapsed (Financially, Not Literally)
A few years ago, I worked on financing a mid-rise condo project. The developer had strong pre-sales and solid projections, but construction costs started rising faster than expected. The senior lender capped their exposure at 70% loan-to-cost, leaving a multi-million-dollar shortfall.
We introduced a B-lender willing to step into a subordinated position. They funded the remaining 15% of project costs under a mezzanine structure, secured against the developer’s shares in the SPV. The developer’s own capital filled the C-layer.
Everything was moving smoothly—until a delay pushed occupancy back six months.
Thanks to the intercreditor agreement (which set out how the A and B lenders would cooperate during tough times), the senior lender agreed to an interest reserve draw, and the mezzanine lender held off on enforcement. The project stabilized, sold out, and both lenders were repaid in full—with the mezzanine lender earning a handsome double-digit return.
Without that subordinated structure, the project might never have reached completion.
How Realtors and Clients Can Use This Knowledge
If you’re a realtor, understanding subordination gives you an edge in identifying:
- Properties or projects that may require layered financing.
- Developers who could benefit from mezzanine or preferred equity options.
- Investment opportunities that offer higher yields for higher risk.
If you’re an investor or developer, knowing how the A/B/C structure works helps you:
- Strategically use capital to expand without overleveraging.
- Speak the language of institutional lenders and equity partners.
- Evaluate your position in the capital stack—and negotiate accordingly.
Here’s the takeaway: knowing where you sit in the repayment line is crucial. It’s not just about what you invest—it’s about when and how you get paid back.
Allen’s Final Thoughts
A/B/C subordination might sound like something only the big players worry about, but it’s actually the financial backbone of how commercial real estate gets done.
Understanding how these layers interact can transform the way you approach deals—whether you’re a realtor structuring a sale, a developer building your next project, or an investor looking for the right balance between risk and return.
As your mortgage agent, I’m here to help you navigate these layers—to find the right mix of senior, mezzanine, and equity financing that makes sense for your goals. I’ll coordinate with your legal, accounting, and lending teams to ensure the structure not only works but flows.
Because in commercial real estate, it’s not just about finding the money—it’s about stacking it in the right order. And that’s where I can make all the difference.
