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Gap Capital Playbook: Preferred Equity & Mezz for Customers You Can’t Serve with Term Debt
George Tsividakis
August 14, 2025
Turn “declined” files into closings (and fees) by filling the space between senior loan proceeds and sponsor cash.
1 | Why Gap Capital Exists—and Why Your Phone Rings About It
Typical Hurdle | Senior Lender Reaction | Gap Capital Fix |
65 % LTV cap after stricter credit box | “Come back with more equity.” | Preferred equity tops stack to 80–85 % LTC |
Rising DSCR thresholds (1.35 → 1.50) | Cuts proceeds 10–15 % | Mezz adds subordinated debt without DSCR hit |
Construction cost overruns | Senior lender caps dollars | Pref/mezz funds over-budget hard costs |
Sponsor has cash—just not today | Delays closing, risks contract | Gap capital wires in ≤ 30 days; sponsor repays via syndication or refi |
If you broker SBA, agency, or bank CRE loans, these borrowers show up in your inbox every week. Decline them and they’ll land with someone else—and come back for the take-out loan later with that new broker.
2 | Preferred Equity vs. Mezzanine Debt—Know the Tools
Feature | Preferred Equity | Mezzanine Debt |
Position in Stack | Above common equity, below debt | Junior to senior debt |
Collateral | Pledge of ownership interests (no mortgage) | UCC on interests + intercreditor |
Typical Coupon | 9–12 % current + accrual/participation | 10–13 % current &/or PIK |
DSCR Tested? | No (treated as equity) | Yes, but lender-specific spreads |
Recourse | None | Bad-boy only |
Exit | Cash-out refi or sale | Same; may convert to pref if refi delayed |
Broker Fee Potential | 0.5–1.0 pt placement + success fees | 0.5–1.5 pt origination |
Rule of Thumb:
Preferred equity for ground-ups, value-add, or whenever DSCR is tight.
Mezz for stabilized cash-flowing assets the bank simply won’t hit 75 % LTV on.
3 | Packaging a Gap-Capital Deal in One PDF
Section | Bullet Items |
Executive Summary | Project, total budget, senior loan proceeds, gap dollar amount, target leverage |
Sources & Uses Table | Show senior, gap, common equity—every dollar accounted for |
Pro Forma | 5-year NOI + exit cap; highlight refi/sale year |
Sponsor Overview | Track record, net worth, liquidity, GP % |
Senior Loan LOI or Term Sheet | Confirms proceeds and covenants |
Construction or Cap-Ex Budget (if applicable) | Line-item CSI format |
Market Comps | Sale or rent comps, occupancy trend |
Sensitivity Matrix | DSCR or coverage at various interest-rate & rent scenarios |
LoanFunders.com’s placement desk accepts this single PDF and circulates to our 7,000-lender equity & mezz network—no “data room” needed.
4 | Intercreditor & Waterfall Basics—Keep Lawyers Happy
Topic | Preferred Equity | Mezz Debt |
Voting Rights | Limited to major decisions (transfer, new debt) | Cure rights & step-in on senior default |
Payment Priority | Current coupon, then accrual, then common equity | Current interest, then PIK, then equity |
Standstill | Typically 60–90 days before enforcement | 30–60 days; faster if payment default |
Exit Waterfall | Senior debt → pref → common | Senior → mezz → equity |
Provide a draft operating-agreement or intercreditor outline in your package—saves 1–2 weeks of legal back-and-forth.
5 | Case Study—$22 M Multifamily Re-Position, Houston
Capital Layer | Dollars | Terms |
Senior Bridge Loan | $14.3 M (65 % LTC) | SOFR + 550 bps, 24 mo I/O |
Preferred Equity (Gap) | $4.4 M (20 % LTC) | 10 % current, 2 % accrual, 30 % promote |
Common Equity | $3.3 M | GP 15 % carry |
Broker Fees | 1 pt senior ($143 k) + 0.75 pt pref ($33 k) | $176 k total |
Senior couldn’t exceed 65 % LTC; pref filled the gap, sponsor closed, broker earned $176 k and still controls the agency take-out slated at stabilization.
6 | How to Pitch Gap Capital to the Borrower
“Your bank will fund 65 % LTC. Instead of raising another $4 M of friends-and-family equity in 30 days, plug the gap with preferred equity at 10–12 %. You keep control, close on time, and refinance once NOI stabilizes.”
Investors value speed & certainty over a few percentage points of coupon— especially in a hot contract period.
7 | Fee Structures for Brokers
Deal Size | Typical Gap Layer | Broker Pay |
$3-10 M | Mezz note, 11–13 % | 1 pt + |
$10-30 M | Preferred equity, 9–11 % | 0.5–0.75 pt |
$30-75 M | Combo mezz + pref | 0.5 pt + potential success fee |
LoanFunders.com disburses at closing—no waiting on sponsor waterfalls.
8 | Quick-Start Checklist (5 Days to Live Deal)
Day | Action |
1 | Sign placement agreement & fill 8-item checklist |
2 | Send senior term sheet, sources/uses, and pro-forma |
3 | Receive preliminary pricing grid from LoanFunders.com network |
4 | Select top 2–3 offers; schedule joint call with sponsor |
5–10 | Issue LOI, legal docs, and soft close gap layer while senior loan underwrites |
Gap capital and senior debt then fund simultaneously—one closing, two fees.
Ready to Plug the Gap?
Upload your sources-and-uses sheet and senior LOI—LoanFunders.com will blast it to 7,000+ gap-capital desks and deliver term sheets within 72 hours.
When term debt hits the ceiling, we raise the roof.