Covenants in real estate private debt: 2026 guide
Covenants in real estate private debt are the conditions a borrower agrees to meet throughout the life of a loan (for example, not exceeding a maximum LTV) and that let the lender react in time if a transaction deteriorates. For an investor they are one of the best signs of a well-built structure. This guide explains the main types, shows how they work through an illustrative example and lists the questions worth asking before investing.
This text is for general information. It is not investment advice.
What covenants are and what they are for
A covenant is a clause in the financing agreement. It sets a limit or an obligation and, if it is breached, triggers agreed consequences: reporting, adding collateral, repaying part of the loan or, ultimately, accelerating the debt.
Its purpose is not to “punish” the borrower. It gives the lender an early warning to act before a problem becomes a default. It is a contractual safety net, but it does not remove risk.
Types of covenants in a real estate transaction
| Type | What it controls | Example clause |
|---|---|---|
| Financial | Relationship between debt, value and cash flow | Maximum LTV; minimum interest cover ratio (ICR) |
| Information | Transparency towards the lender | Regular reports, updated valuation, construction progress |
| Positive | Borrower obligations | Keep insurance, pay taxes, maintain the property |
| Negative | Limits on the borrower’s actions | No sale or charge over the asset without consent; no additional debt |
In property-backed debt, the most important is usually the LTV (loan-to-value: the loan as a share of the property’s value), because it measures how much cushion remains if values fall.
Illustrative example: how an LTV covenant works
This is an illustrative and hypothetical example, not a real transaction. A EUR 1,000,000 loan is secured on a property valued at EUR 1,600,000, so the initial LTV is 62.5%. The agreement sets a maximum LTV covenant of 70%.
| Fall in property value | Value | Resulting LTV | 70% exceeded? |
|---|---|---|---|
| 0% | EUR 1,600,000 | 62.5% | No |
| 10% | EUR 1,440,000 | 69.4% | No (close to limit) |
| 20% | EUR 1,280,000 | 78.1% | Yes |
On these assumptions, the covenant would trigger after a fall in value of about 10.7%. The agreement could then require extra collateral or a partial repayment. Without a covenant, the lender would only find out when the first payment is missed.
What happens when a covenant is breached
A breach is not the same as a default and does not mean an automatic loss. The usual sequence is notice, a cure period, negotiation and, if it is not fixed, acceleration and enforcement of the collateral. Lenders sometimes grant a waiver in exchange for conditions such as more collateral, a higher margin or a partial repayment.
That flexibility is useful but needs judgement: repeated waivers, extended maturities or capitalised interest can hide deterioration. We looked at this in our article on hidden defaults in private credit.
Trends: what is happening worldwide and in Spain
- World (14 October 2026). Moody’s published an analysis of US private credit in which the reported default rate (4.0%) rises to 5.8% once extensions and payment-in-kind cases at weak companies are included. See Moody’s report. Lesson for investors: the quality of documentation and monitoring matters as much as the interest rate.
- Europe (July 2026). According to the ECB Bank Lending Survey, a net 7% of euro area banks tightened credit standards for firms in the second quarter of 2026, with further tightening expected in the third. When banks lend more cautiously, alternative finance gains ground, and so does the importance of negotiating terms well.
- Spain (October 2026). The Observatory of Alternative Financing with Mortgage Collateral in Spain, with market analysis by PwC and legal framework by Cuatrecasas, reports for 2025 an average LTV of 55%, an average rate of 10% and an average term of 28 months. See the full report and our market summary.
How to assess covenants before investing
- They should be measurable. An LTV or ICR can be calculated; “maintaining an adequate financial position” is vague.
- Regular information. Without updated valuations and reports, a covenant cannot be monitored.
- Headroom. A limit that is too loose warns late; one that is too tight causes constant breaches.
- Defined consequences: cure period, extra collateral, repayment or acceleration.
- Who grants waivers and on what criteria.
Risks to consider
- A covenant is not a guarantee of repayment. It raises an alert but cannot stop asset values falling or the borrower running into difficulty.
- Risk of capital loss. All investments carry risk, including partial or total loss of the capital invested.
- Illiquidity and term risk. Transactions can last longer than planned and there is no market in which to sell easily.
- Reliance on valuation. If value is hard to measure, an LTV covenant loses effectiveness.
- Enforcement risk. Recovering collateral takes time and costs money; property collateral mitigates risk but does not remove it.
How Ondara Group works
Since 2018, Ondara Group has structured private debt transactions backed by real assets as collateral. We analyse each transaction individually, seek diversification and keep direct contact with the management team. Transactions are approached with target double-digit returns, never guaranteed. Learn more about us and the group’s brands.
Frequently asked questions
What is a covenant in a loan?
It is a clause requiring the borrower to meet certain conditions during the loan and giving the lender rights if it does not.
What is an LTV covenant?
It is a cap on the loan relative to the property’s value. If values fall and the cap is exceeded, it can require extra collateral or repayment.
Does breaching a covenant mean losing the money?
Not necessarily. It usually opens a negotiation, but it can end in acceleration and enforcement. The outcome depends on the collateral and the process.
What is the difference between financial and information covenants?
Financial covenants measure ratios (LTV, ICR); information covenants require regular data and documents so those ratios can be monitored.
What should I ask about covenants before investing?
Which ratios are measured, how often, at what threshold, what happens on a breach and who can grant waivers.
In summary
- Covenants are contractual alerts that let lenders act before a default.
- A maximum LTV is the most relevant in property-backed debt.
- Thresholds matter, but so do regular information and how waivers are handled.
- They do not remove risk: any investment can lose money, including all of it.
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This article is for information purposes only and does not constitute an investment recommendation or financial advice. All investments carry risks, including the possible loss of the capital invested, and past or target returns do not guarantee future returns. Analyse each opportunity with a professional before investing.
