Debt vs Equity Financing for Hotels and Apartment Buildings
How the capital stack works for hotels and apartment buildings: senior debt, mezzanine, preferred and common equity, and what each costs in money and control.
Updated & fact-checked Figures are linked to their sources at the end of the article.
Every hotel or apartment purchase is paid for with some mix of debt, money that must be repaid with interest, and equity, money that owns a share of the property and is paid from whatever is left. Between a plain first mortgage and the owner’s own cash sit several in-between layers: mezzanine loans and preferred equity. Together they make up the capital stack.
This guide is for owners and buyers structuring a deal. It explains each layer, what it costs, how much control it takes, and how the mix changes the risk to the owner. For loan types specific to each property, see our guide to financing hotels and apartment buildings.
The capital stack, layer by layer
The stack is paid from the top down. Each layer is paid only after the ones above it are paid in full, both from the property’s cash flow and from sale or refinance proceeds. The lower a layer sits, the more risk it carries and the higher the return it expects.
| Layer | What it is | Secured by | Control rights |
|---|---|---|---|
| Senior debt | The first mortgage from a bank, insurer, credit union or agency lender | A registered mortgage on the property | Covenants and reporting; can enforce on default |
| Mezzanine debt | A loan to the owner of the property-owning company | A pledge of the ownership interests, not the property itself | Can take over the owning company on default, subject to an agreement with the senior lender |
| Preferred equity | An investment that ranks ahead of the common equity for a fixed return | No security; contractual priority | Consent rights on major decisions; may take control if its return is not paid |
| Common equity | The owner’s and partners’ capital | Nothing; paid last | Runs the property; keeps all the upside after the layers above are paid |
What debt does to an owner’s risk
Debt is usually the cheapest capital because the lender is paid first. It also magnifies results in both directions: if the property does well, the owner’s return on equity rises; if income falls, the owner absorbs the whole drop while the debt payments stay the same.
| Item | Lower leverage | Higher leverage |
|---|---|---|
| Purchase price | $10,000,000 | $10,000,000 |
| Loan (loan-to-value) | $5,000,000 (50%) | $7,500,000 (75%) |
| Owner’s equity | $5,000,000 | $2,500,000 |
| Net operating income | $600,000 | $600,000 |
| Annual debt payments (example) | $330,000 | $495,000 |
| Cash flow to owner | $270,000 | $105,000 |
| Debt service coverage ratio | 1.82 | 1.21 |
| If income falls 15% to $510,000: cash flow | $180,000 | $15,000 |
In the example, the higher-leverage owner puts in half as much cash, but a 15% fall in income almost wipes out the cash flow. A hotel’s income can move that much in a bad year; that is why hotel lenders lend less against the same value.
How much debt is available
Leverage depends on the property type and the lender.
- Canadian apartment buildings can use CMHC-insured mortgages: up to 85% loan-to-value under standard multi-unit insurance, and up to 95% under MLI Select for buildings that meet its affordability, energy-efficiency or accessibility targets.[1][2] High insured leverage leaves little room for mezzanine or preferred layers; check what the loan documents allow before adding any.
- Hotels have no CMHC equivalent and are financed conventionally, at lower leverage. The gap between the loan and the price is filled with more equity, a partner, or mezzanine or preferred capital.
- U.S. owner-operated hotels can use the SBA 504 program, where a bank first mortgage and an SBA-backed second loan sit above a borrower contribution of at least 10% of project cost, rising to 15% for a limited- or single-purpose building or a business that has operated for two years or less.[3] SBA loans are not available for rental apartment buildings.[4]
Choosing between more debt and more equity
Adding debt versus adding equity
More debt
- Cheaper than equity while income covers the payments
- You keep the ownership and the upside
- Fixed payments whatever the property earns
- Covenants, guarantees and the risk of enforcement on default
- Must be repaid or refinanced at maturity, at future rates
More equity from partners
- No fixed payments; partners share the bad years
- Lower risk of losing the property in a downturn
- You give up a share of the profit and the sale proceeds
- Partners expect a say in major decisions
- Needs a partnership agreement covering the split, control and exit
Mezzanine debt and preferred equity sit between the two. They let an owner keep more of the common equity than a partner would, at a higher cost than the first mortgage. They also add a second party with enforcement or control rights, and the senior lender must agree to them.
Questions to ask before you choose
- What does each layer cost, including fees, and what return does each equity investor expect?
- What happens to each layer if income falls 15% or 25%?
- Who can block a sale, a refinance or a major capital project?
- Who takes control, and how, if a payment is missed?
- When must each layer be repaid or bought out, and where will that money come from?
For partnership terms, see our guides to joint ventures and structuring a joint venture agreement.
Sources
- Mortgage Loan Insurance for Standard Rental Housing — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
- MLI Select — Canada Mortgage and Housing Corporation, Published September 21, 2026. Checked 2026-10-12.
- 13 CFR 120.910: Borrower contributions — Electronic Code of Federal Regulations (U.S.). Checked 2026-10-12.
- 13 CFR 120.110: What businesses are ineligible for SBA business loans? — Electronic Code of Federal Regulations (U.S.). Checked 2026-10-12.
