Preferred Equity, Mezzanine Capital Surge in Hotel Acquisitions

By Majid Radaei, RadCRE · 2026-03-26 · Market Updates

Heightened senior debt costs and stricter lending standards are propelling preferred equity and mezzanine debt usage in hotel acquisitions, filling capital stack gaps often exceeding 25% LTV.

The Resurgence of Subordinated Debt in Hotel Financing

The commercial real estate landscape, particularly within the hospitality sector, continues to navigate a challenging financing environment characterized by elevated interest rates and reduced senior debt availability. This dynamic has led to a significant resurgence in the deployment of preferred equity and mezzanine debt to bridge capital stack gaps in hotel acquisitions. As traditional lenders maintain conservative loan-to-value (LTV) ratios, often in the 55-65% range, sponsors are increasingly relying on these higher-cost, flexible capital sources to meet their proforma returns.

According to data from MSCI Real Assets (formerly RCA), the share of hotel transactions utilizing some form of subordinated debt equity has risen by approximately 15% year-over-year in Q1 2026 compared to Q1 2025. This trend is driven by persistent senior debt market conditions, where all-in interest rates for floating-rate hotel construction and acquisition loans typically range from SOFR + 300-600 basis points. With SOFR currently hovering around 4.31%, borrowers are facing effective rates of 7.31% to 10.31% on senior debt alone.

Key Drivers & Market Examples

The tight credit market has compressed senior loan proceeds, making it difficult for sponsors to achieve desired leverage targets with conventional bank or CMBS financing. Preferred equity and mezzanine debt, while more expensive, offer a crucial solution by providing additional capital above the senior loan, typically pushing total leverage into the 70-85% LTV range. These instruments carry return expectations ranging from 12-18%, representing the higher risk profile they assume within the capital stack.

Recent examples highlight this trend. Starwood Capital, a prolific hotel investor, has reportedly utilized preferred equity in several recent hotel acquisitions, including a portfolio of select-service assets in the Southeast, to bridge the gap between their equity and senior debt. Similarly, Brookfield Asset Management has been active in providing mezzanine financing for large-scale hospitality developments and acquisitions where traditional bank liquidity is constrained. These institutional players recognize the opportunity to earn attractive risk-adjusted returns in a market where senior lenders are pulling back.

The structure of these deals often involves a senior loan from a regional bank or debt fund, followed by a preferred equity investment, and sometimes a mezzanine loan layered below that. The preferred equity often takes a pari-passu position with common equity in terms of upside, but with a preferred return and often a liquidation preference. Mezzanine debt typically functions more like a loan, secured by a pledge of ownership interests in the borrowing entity, and carries a fixed or floating interest rate that is paid current or accrues.

RadCRE Perspective

Majid Radaei, Founder of RAD Commercial Realty, notes: "We're seeing a fundamental reset in hotel capital stacks. The days of 75-80% LTV from a single senior lender are gone for now. Our clients are consistently facing a 15-25% 'funding gap' after securing their senior debt. This is precisely where preferred equity and mezzanine capital become indispensable. We're actively structuring deals with senior debt at 55-60% LTV from non-bank lenders or private debt funds, followed by programmatic preferred equity providers taking another 15-20% slice, often priced at 14-16%. For a value-add hotel deal, this blended cost of capital, while higher than historical norms, can still generate compelling equity returns when executed correctly. The key is understanding the true cost of equity and structuring waterfall distributions creatively. We're also seeing a strategic shift where some operating partners are opting for preferred equity from institutional groups instead of traditional JV common equity, as it can be less dilutive to their promote structure. It's a nuanced game, and our role is to navigate our clients to the most efficient capital – whether that's a SOFR + 350 bps senior bridge loan or a 15% preferred equity tranche."

Outlook for Hotel Capital Stacks

As long as interest rates remain elevated and senior lenders maintain their conservative posture, preferred equity and mezzanine finance will continue to play a critical role in facilitating hotel transactions. While the cost of these capital sources is higher than senior debt, they offer flexibility and the ability to close deals that might otherwise not pencil out. Investors who can successfully integrate these tools into their capital stack strategies will be best positioned to acquire desirable hotel assets in the current market cycle.

Tags: commercial real estate financing, hotel investment sales, preferred equity, mezzanine debt, capital stack, SOFR, LTV, RadCRE

Sources: MSCI Real Assets, CoStar, Commercial Observer, GlobeSt, Starwood Capital public reports, Brookfield Asset Management investor calls