An investment’s or security’s position that will suffer the first economic loss if the underlying assets lose value or are foreclosed upon. In the context of commercial real estate, the first-loss position typically refers to the equity position of an investment. For instance, if an investment property is acquired for $1,000,000 by utilizing $250,000 of equity and $750,000 of debt and the property is later sold for $900,000, then the sales proceeds would first be used to repay the loan, and any remaining funds would then belong to the equity investor. In this example, the $900,000 sales proceeds would fully repay the $750,000 debt, but would only return $150,000 to the equity investor - meaning the equity investor would suffer the first losses. The debt position, by contrast, would not suffer a loss unless the sales proceeds dropped below $750,000. The first-loss position carries a higher risk and, generally, the potential for higher yield.
