What Is Capital Stack?
The capital stack is the combination of debt and equity used to pay for a property, ranked by who gets paid first. Senior debt sits at the bottom with the first claim and lowest risk, followed by mezzanine debt and preferred equity, with common equity on top - last to be paid and first to absorb losses.
Capital Stack in plain English
Picture the money behind a property as a stack. At the bottom is the senior mortgage, paid first and safest. Above it can sit mezzanine debt and preferred equity. At the top is common equity - the owners - paid last.
The higher a layer sits, the more risk it takes and the higher return it expects. If the property loses value, losses hit the top of the stack first.
Worked example
The capital stack of a $1 million project
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Total project cost
- $1,000,000
- Senior mortgage
- $650,000
- Mezzanine loan
- $100,000
- Preferred equity
- $50,000
- Common equity
- $200,000
| Step | Calculation | Result |
|---|---|---|
| 1. Senior loan-to-cost | $650,000 ÷ $1,000,000 × 100 | 65% |
| 2. Combined debt-to-cost (senior + mezzanine) | $750,000 ÷ $1,000,000 × 100 | 75% |
| 3. Equity cushion below the debt | $50,000 + $200,000 | $250,000 |
Total debt as a share of cost: 75%. If the property were sold for $800,000, the senior lender and the mezzanine lender would be repaid in full, preferred equity would get its $50,000 back, and common equity would get nothing - it absorbs the first $200,000 of any loss, which is why it expects the highest return.
What this calculation leaves out
- Order of repayment is set by loan documents and intercreditor agreements, not by convention alone.
- Selling costs and accrued interest come out before equity is paid.
Why it matters
Where an investor sits in the stack decides both the return they can expect and how much of a loss they can absorb before losing money.
The more debt below you, the less the property can fall in value before your investment is wiped out - even though leverage raises your potential return.
When Capital Stack is used
- Deciding where to invest in a deal - safer, lower-return debt or riskier equity.
- Structuring financing for a development or acquisition.
- Reading a syndication offering to see how much debt sits ahead of investors.
Common mistakes
- Looking only at the senior loan-to-value and missing mezzanine debt or preferred equity ahead of common equity.
- Assuming preferred equity is as safe as debt.
- Ignoring intercreditor terms that decide who controls the property in a default.
Capital Stack: frequently asked questions
What are the layers of a capital stack?
Usually senior debt, mezzanine debt, preferred equity and common equity, from first-paid to last-paid. Not every deal uses every layer.
Who gets paid first in a capital stack?
The senior lender. Each layer is paid in order, so common equity is paid only after everything below it.
Why does common equity earn the most?
Because it takes the first loss. Investors demand a higher potential return for being last in line.
More Investing Terms
Recommended next step
Measure how much of the project the debt layers fund.
Loan-to-cost →Apply it to a specific property: Five-Year Investment Projection.
Sources and review
No regulator defines this term; the page follows common industry practice.
Where this applies: Not regulated. Investment and valuation ratios are industry and appraisal conventions; lenders, appraisers and analysts may define inputs differently, so check how a figure was calculated.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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