Capital Stack
The layers of financing in a deal, ranked by repayment priority from senior debt to common equity.
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.
Formula
Senior debt sits below mezzanine, preferred equity, and common equity
Worked Example
A $10,000,000 project is funded with $6,000,000 senior debt, $1,500,000 mezzanine, $1,000,000 preferred equity, and $1,500,000 common equity. In a sale, proceeds repay the layers in that order from the bottom up.
Why It Matters
The capital stack determines who bears risk and who gets paid first. Understanding your position tells you how protected your capital is and what return you should expect for the risk you take.
Related Terms
Related Programs and Tools
Frequently Asked Questions
What sits at the top of the capital stack?
Common equity sits at the top. It gets paid last and absorbs the first losses, which is why it carries the highest risk and the highest potential return.
Why add mezzanine or preferred equity?
They raise total leverage and cut the common equity a sponsor must contribute. The trade-off is a higher blended cost of capital and more parties in the deal.