Capital Stack

The capital stack is the full layered structure of financing used to fund a real estate deal, ranked by seniority and risk: senior debt at the bottom (lowest risk, lowest return), then mezzanine debt, then preferred equity, then common equity at the top (highest risk, highest potential return). Understanding where each dollar sits determines who gets paid first, and who absorbs losses first if the deal underperforms.

The capital stack concept is the organizing framework for how CRE deals are financed and how risk and return are allocated among different capital providers. Every layer has a different risk-return profile: senior debt is repaid first and takes the smallest loss risk, so it earns the lowest return; common equity is repaid last (after all debt and preferred returns) and absorbs losses first, so it demands and can earn the highest return.

In a downside scenario — a sale or refinance that doesn't generate enough proceeds to repay everyone — the stack is unwound from the top down: common equity is wiped out first, then preferred equity, then mezzanine debt, with senior debt the last to take any loss. This waterfall logic is why senior lenders can offer the lowest rates (they're the most protected) and why common equity investors demand the highest target returns (they're the most exposed).

Sponsors structure the capital stack to minimize the blended cost of capital while retaining as much upside and control as possible, which is why layering in mezzanine debt or preferred equity — rather than raising all the gap capital as common equity — is common on larger or more leveraged deals.

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