One rate for the whole stack.
A blended rate is the weighted average cost of every piece of financing in a deal. Enter the amount and rate of the senior loan, the mezzanine loan, preferred equity or any other tranche, and the calculator returns the blended rate, total financing and the annual interest cost of the stack.
- Total financing
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- Annual interest cost
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What a blended rate measures
When a deal is financed in more than one piece, each piece has its own rate. The blended rate weights each rate by the dollars behind it, so a large senior loan at a low rate and a small mezzanine loan at a high rate combine into a single figure that describes the whole capital stack.
The formula is the sum of each amount times its rate, divided by the total amount. It is the same weighted average interest rate calculation used to compare a first and second mortgage against a single refinance, applied to commercial structures.
A worked example
A sponsor finances an acquisition with a $6,000,000 senior loan at 6.5 percent, a $2,000,000 mezzanine loan at 11 percent and $500,000 of preferred equity with a 14 percent preferred return. The annual cost is $390,000 plus $220,000 plus $70,000, or $680,000, on $8,500,000 of financing. The blended rate is 8.0 percent.
| Piece | Amount | Rate | Annual cost |
|---|---|---|---|
| Senior loan | $6,000,000 | 6.5% | $390,000 |
| Mezzanine loan | $2,000,000 | 11.0% | $220,000 |
| Preferred equity | $500,000 | 14.0% | $70,000 |
| Total | $8,500,000 | 8.0% blended | $680,000 |
How lenders and sponsors use it
Sponsors use the blended rate to compare structures: one larger senior loan, a smaller senior loan plus mezzanine, or a stretch senior or unitranche loan priced in between. If the blended rate of a split structure is below the rate of the single loan that would replace it, the split is cheaper on interest, before fees and intercreditor costs.
Senior lenders look at it from the other side. A blended rate well above the property's cap rate or debt yield means the stack is expensive to carry, and the senior lender's coverage is only as good as the property's ability to pay every layer above it.
What the blended rate leaves out
It is a snapshot of current balances and stated rates. It ignores fees, exit fees, amortization that pays some pieces down faster than others, floating rates that reset, and any accrual on preferred equity. Use it to compare structures quickly, then model the full cash flows before committing.
Questions lenders ask
- How do you calculate a blended rate?
- Multiply each loan amount by its interest rate, add the results, and divide by the total of the amounts. $6M at 6.5% plus $2M at 11% plus $0.5M at 14% gives $680,000 of annual interest on $8.5M, a blended rate of 8.0%.
- What is a weighted average interest rate?
- The same thing as a blended rate: the average of several rates, each weighted by the balance it applies to. Larger balances pull the average toward their rate.
- Should preferred equity be included in a blended rate?
- Include it when you want the full cost of capital above the sponsor's common equity, since preferred equity has a fixed preferred return that behaves like interest. Leave it out when you only want the cost of debt.
- Is a lower blended rate always better?
- Not always. A split structure can have a lower blended rate but higher fees, tighter intercreditor terms, or more refinancing risk at maturity. Compare total cost and terms, not just the rate.
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