Priority is only half the story
Top to bottom: hard first mortgage, then subordinate hard debt if any, then soft public debt in whatever order the sources negotiated among themselves, then seller or sponsor notes, then deferred fee, then equity. Payment and foreclosure priority run in that order, more or less, modified by whatever the intercreditor agreement actually says.
But priority tells you about a default, and most deals do not default. What governs the ordinary life of the deal is a different question: who has consent rights, who gets reports, whose covenants bind the operating budget, and who can block a refinancing or a sale in year eleven.
What each layer wants
The first mortgage lender wants coverage and a lien. It prices to risk, it does not share upside, and its main concern after closing is that the reports arrive and the coverage holds.
The equity investor is not lending. It bought a stream of tax credits plus losses, and its exposure runs for the full fifteen year compliance period. That makes it the most interested party in compliance and the most conservative about anything that could trigger recapture. It will hold consent rights over most meaningful decisions and it will expect reporting that is considerably more detailed than the lender's.
Soft lenders and public sources care about the use restriction and the public purpose. They are usually patient on repayment and inflexible on the affordability covenant, the term of which commonly outlasts both the loan and the compliance period.
The sponsor's own money, usually a deferred fee, sits at the back and gets paid from available cash flow over years. It is the layer that absorbs the difference between the pro forma and reality.
Where the layers conflict
Reserves are a common one. Three parties can each have a reserve requirement, defined differently, and if nobody reconciles them the deal funds the same risk three times out of a budget that could not afford it once.
Cash flow waterfalls are another. Deferred fee repayment, soft loan payments, incentive management fees and partnership distributions all draw on the same residual, and the order is negotiated, not standard. Read the waterfall before you agree to a deferred fee you are counting on.
And affordability terms. A thirty year state covenant and a fifteen year compliance period and a fifty year local land covenant are three different horizons, and the exit you plan in year fifteen is governed by the longest one.
The practical use of all this
When you are deciding whether to add a layer, the question is not only whether the money is cheap. It is what the layer will ask of the deal for the next three decades, and whether that is compatible with what is already there. Two cheap sources that cannot coexist are more expensive than one that can.
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