Navigating Hotel Acquisitions: Preferred Equity & Mezzanine Strategies

By Majid Radaei, RadCRE · 2026-04-27 · Industry Insights

Despite high interest rates (SOFR ~4.31%), preferred equity and mezzanine debt are filling capital gaps for hotel acquisitions, comprising up to 25% of the capital stack in recent HVS-reported deals.

The Evolving Landscape of Hotel Capital Stacks

The current high-interest rate environment, characterized by an SOFR hovering around 4.31% and Prime at 8.50%, continues to recalibrate real estate investment strategies, particularly within the hospitality sector. With traditional senior debt providers becoming more cautious and LTV ratios compressing, preferred equity and mezzanine debt have emerged as critical components in structuring hotel acquisitions. These capital stack layers are enabling deals that might otherwise stumble, providing crucial funding and flexibility for sponsors.

Increased Reliance on Alternative Capital

Recent market data, including insights from HVS and Hotel Business, indicates a significant uptick in the deployment of alternative capital solutions. Many traditional lenders are now targeting senior loan-to-value (LTV) ratios in the 45-60% range for hotel assets, a material shift from the pre-2022 era. This conservative lending posture leaves a substantial gap between sponsor equity and senior debt, a void increasingly filled by preferred equity and mezzanine financing. According to a recent report by Trepp, the average LTV for new CMBS hotel loans originated in Q1 2026 was approximately 62%, with many deals requiring additional layers beyond the senior tranche.

Blackstone, a prolific investor in hotels, has publicly stated its agile approach to capital structuring, often deploying preferred equity from its own credit funds or partnering with specialized mezzanine providers to optimize returns in its large-scale acquisitions. Similarly, Starwood Capital Group has been active in deploying flexible capital solutions for its hospitality portfolio, recognizing the need for bespoke financing solutions in today's market. These strategies are particularly prevalent in value-add acquisitions where sponsors seek to enhance property performance through renovations or repositioning, requiring more flexible capital than traditional bank loans can offer.

Typical Structures and Pricing

Preferred equity and mezzanine debt for hotel assets typically command higher returns than senior debt, reflecting their subordinate position in the capital stack and increased risk. Current pricing for mezzanine financing ranges from 12% to 18%, often with a blend of current pay and accrual components. Preferred equity, being slightly riskier and often structured as equity with a fixed return or coupon, usually falls within the 15% to 20% range, sometimes with a participation feature. Bridge lenders, a key source for interim financing, are quoting rates around SOFR + 300-600 basis points for hotel properties that need repositioning or are undergoing a stabilization period before qualifying for agency or CMBS debt.

For example, a recent hotel acquisition valued at $50 million might see a senior loan of $25 million (50% LTV) with an all-in rate around 7-8% (including SOFR + spread). The sponsor might then secure $10 million in preferred equity at a 16% coupon and contribute $15 million in common equity. This layered approach allows sponsors to minimize their common equity commitment while still closing deals in a tight credit market.

RadCRE Perspective

Majid Radaei, Founder of RAD Commercial Realty, notes, "The current market demands a highly sophisticated approach to capital structuring, especially for hotel acquisitions. Many sponsors are still clinging to pre-2022 expectations of 65-70% LTV senior debt, which is simply not the reality today. We're seeing agency lenders like Freddie Mac and Fannie Mae becoming more active in the multifamily space, but their presence in hotels, especially for value-add plays, remains limited. This creates a prime opportunity for well-capitalized preferred equity and mezzanine providers.

At RadCRE, we consistently educate our clients that a bridge loan combined with a savvy preferred equity tranche is often the most pragmatic path forward for acquisitions and recapitalizations in the hotel sector, particularly for assets with a clear business plan for improvement. We're structuring deals where the blended cost of capital, despite the higher rates on the junior tranches, still makes economic sense when factoring in potential upside from property improvements and future refinancing. The key is understanding lender appetites – who is truly active in this space, their specific property type preferences, and their LTV and debt yield requirements. For instance, while CMBS spreads might seem attractive at T + 150-300 bps, the stringent underwriting and high debt service coverage requirements can often push a deal out of reach without a robust equity cushion or a well-placed pref piece. We are actively advising clients on when to pursue a direct bridge-to-permanent strategy versus a CMBS execution, always with an eye on the most accretive capital stack for their specific deal profile."

Outlook and Implications

The reliance on preferred equity and mezzanine capital is expected to continue as long as interest rates remain elevated and traditional senior lenders maintain their conservative stance. This trend not only provides liquidity to the market but also indicates a growing maturity in how sophisticated investors approach risk and return in complex transactions. For sponsors, understanding the intricacies of these capital layers and having access to a broad network of capital providers, such as those cultivated by RadCRE, is paramount to successful hotel acquisitions in the present environment.

Tags: commercial real estate financing, hotel investment sales, preferred equity, mezzanine debt, CRE capital markets, distressed assets

Sources: HVS, Trepp, Hotel Business, Blackstone Investor Relations, Starwood Capital Group Public Statements