Senior debt is borrowed money with precedence over any other debts owed by an issuer. It takes priority for repayment if the company goes out of business or needs to sell the property.
If the issuer becomes insolvent, it has to pay back this debt before other creditors receive any payment.
In real estate
Broadly speaking, companies offer senior debt through the bond market. Thus, large investment banks guarantee the securities. Investors can then buy and sell their holdings in standardized denominations.
In real estate, though, it usually takes the form of a mortgage loan, with the property under contract held as collateral. The mortgage is almost always first in lien priority.
Senior debt in the capital stack
The capital stack, which ranks the levels of capital by riskiness, has the safest — senior debt — at the bottom. Holders of loans at this level are first in line in case of foreclosure.
Since reward correlates with risk, they also tend to receive the lowest return on investment. Mezzanine debt, then preferred equity then common equity comprise the increasingly more speculative investment layers.
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