The capital stack is the full set of financing layers funding a real estate deal, ordered by who gets paid first. Senior debt sits at the bottom with the lowest risk and lowest return. Above it come mezzanine debt, preferred equity, and finally common equity at the top, with the highest risk and the highest potential return.
Position in the stack sets both priority and price. Lower layers get repaid first in a sale or foreclosure, so they accept lower returns. Higher layers get paid last, take the first losses, and demand higher returns to compensate for that risk.
Sponsors build a stack to fund a deal while balancing cost, leverage, and control. Adding mezzanine or preferred equity raises total leverage and reduces the common equity needed, but it also raises the blended cost of capital and adds parties to the deal.