Gap Capital Playbook: Preferred Equity & Mezz for Customers You Can’t Serve with Term Debt
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.