What Does Rake Bond Mean in Commercial Real Estate?

A rake bond is a CMBS arrangement in which a loan’s senior cash flow goes into pooled CMBS classes and the remaining proceeds of that loan are allocated to junior bonds. The rights that fix the split sit in the pooling and servicing agreement. The senior piece shares the pool with other loans, and the remainder follows the one loan that generated it.

How a rake bond splits one loan into two streams

The mechanism starts with a single loan and cuts its cash flow in two. The senior portion is placed into pooled CMBS classes, where it sits alongside cash flow from other loans. Everything left after that carve-out is allocated to junior bonds.

The cut is a matter of contract. The rights that define each stream are set out in the pooling and servicing agreement, so the agreement, and not the bond label, tells a reader which dollars of the loan land in which class.

The result is a loan whose payments feed two different holder groups. Pool investors see the senior stream mixed with the rest of the collateral, while holders of the junior bonds see a stream tied to that loan.

In a pooled CMBS deal, each tranche holds an undivided interest in the pool, and the junior classes absorb first losses across the loans up to their principal balances. That is a statement about who loses first when collateral underperforms.

A rake allocation answers a different question: which part of one loan’s proceeds is routed to which bonds. Holding a junior bond fed by that remainder does not by itself say where the bond ranks in the pool’s loss waterfall.

A reader who needs the full picture therefore reads both layers. The pooling terms show loss order across the collateral, and the allocation rights show how one loan’s proceeds are divided.

Where the structure sits next to senior tranching and junior debt sales

In a CMBS transaction the most senior debt tranche is typically securitized into multiple classes of bonds. Junior mortgage portions and mezzanine loans might instead be sold to real estate debt funds, which often finance those purchases with borrowing such as real estate CDOs.

A rake bond is another route for the junior economics. The remaining proceeds of the loan are turned into bonds inside the securitization, so the junior piece is carried by securities that sit under the same agreement as the pooled classes.

A pool-wide senior and subordinate split is a useful contrast. In one multifamily securitization, roughly $1 billion of a $1.2 billion security was senior certificates, and the remaining $200 million of mezzanine and subordinate certificates was sold to private capital investors, all backed by the same pool of loans. That split runs across the whole pool, while a rake allocation runs inside one loan.

What the pooling and servicing agreement has to settle

Because the rights live in the agreement, the document carries the analysis. It fixes how the loan’s cash flow is divided between the pooled classes and the junior bonds, and it is the reference point when servicing questions arise.

Servicing standards show the point. When an agreement points to a lender guide for its servicing standard, the servicer of securitized mortgages reads the agreement to see which standard applies.

A rake bond therefore cannot be priced or underwritten from a class name or a rating alone. The allocation language is the product.

Worked example: splitting one hypothetical $200 million loan

Take a hypothetical $200 million loan at a 6 percent rate, observed over one year. Annual interest is $200 million multiplied by 6 percent, or $12 million.

Base case: the agreement places $150 million of the loan into the pooled CMBS classes. The remaining $200 million minus $150 million, or $50 million, is allocated to the junior bonds. At 6 percent, the senior portion carries $150 million multiplied by 6 percent, or $9 million of interest, and the junior portion carries $50 million multiplied by 6 percent, or $3 million. The junior share of the loan is $50 million divided by $200 million, or 25 percent.

Alternative case, same loan, same rate and same year: the agreement places $160 million into the pooled classes. The remainder is $200 million minus $160 million, or $40 million. Senior interest is $160 million multiplied by 6 percent, or $9.6 million, and junior interest is $40 million multiplied by 6 percent, or $2.4 million. The junior share falls to $40 million divided by $200 million, or 20 percent.

Total interest is still $12 million in both cases. Only the division moves: $0.6 million of annual interest shifts from the junior stream to the senior stream when the senior carve-out grows by $10 million. The pro rata interest split is a simplifying assumption for the illustration, since the actual division follows the agreement.

Mistakes when reading a rake bond

Treating the junior allocation as the same thing as subordination in the pool is a basic analytical slip. The allocation divides one loan’s proceeds, while first loss across loans is a property of the pooled tranches and their principal balances.

Assuming every class holds the same claim on the loan overlooks the carve-out. In the base case of the worked example, the pooled classes reach only part of the loan, so the junior bonds depend on the remainder.

Reading the junior share as a fixed fraction of the loan carries the example’s 25 percent into places it does not belong. The share is whatever the agreement sets, and the alternative case shows it moving to 20 percent with a single change to the carve-out.

Relying on a summary of the structure leaves the operative terms unread. The senior and remaining cash flows are defined by the pooling and servicing agreement, and a label or a deal summary cannot substitute for that language.

Checklist questions for a rake bond allocation

Which part of the loan is the senior cash flow placed into pooled classes? That carve-out sets the size of everything that remains.

How does the agreement define the remaining proceeds allocated to junior bonds? The definition decides what the junior holders actually receive.

Which pooled classes receive the senior stream? Each tranche holds an undivided interest in the pool, so the senior stream joins shared collateral.

Where do the junior bonds sit in the pool’s loss order? First losses across loans fall on junior classes up to their principal balances, which is a separate test from the proceeds split.

Is the junior economics carried by bonds, or by a sold junior mortgage portion or mezzanine loan? Those routes sit in different documents and can be held by different buyers.

Does the servicing standard come from the agreement itself or from a guide it points to? The answer shows which text governs a servicer’s decisions.