The layered financing structure that funds a real estate deal.
The capital stack is the layered structure of debt and equity financing that funds a real estate transaction. Each layer has a different position in the priority of payment, a different risk profile, and a different return expectation — from senior debt at the safest position with lowest returns, to common equity at the riskiest position with the highest upside.
The capital stack determines both the financial structure and the risk distribution of a deal. Senior debt is the largest and safest layer — it gets paid first from cash flow and gets first claim on proceeds in default. Common equity is the smallest (but most levered) layer — it's last to be paid but captures all upside above the other layers' returns. Everything in between (mezz, pref) is structured to bridge the gap.
The structure each deal uses depends on the asset type, sponsor strategy, and risk tolerance. Stabilized core property might use just senior debt + sponsor equity. Value-add deals often add mezz to push leverage higher without diluting sponsor equity. Ground-up development typically uses the deepest stacks — senior construction + mezz + pref + common — because total capital needs are high relative to any single source.
Each layer's return reflects its risk position. Senior debt at first position with collateral protection prices at 6–10%. Mezz at second position with LLC interest pledge prices 11–16%. Pref equity with priority distributions but no security prices 8–14%. Common equity has no defined return but targets 14–25%+ IRR by capturing upside above all other layers.
Sophisticated sponsors think about the capital stack as a portfolio of capital sources, each with its own cost, terms, and execution risk. Optimizing the stack means finding the mix of leverage, mezz, and pref that maximizes sponsor returns at acceptable execution risk. Over-leveraging produces fragile deals; under-leveraging dilutes sponsor returns. The right answer is asset-, market-, and timing-specific.
| Total project cost | $25,000,000 |
| Senior bridge debt (65% LTC) | $16,250,000 — SOFR + 350, IO |
| Mezz debt (12% LTC) | $3,000,000 — 12.5% fixed, IO |
| Preferred equity (8% LTC) | $2,000,000 — 10% pref + 25% upside |
| Common equity (15% LTC) | $3,750,000 |
| Total stack share | |
| Senior | 65% |
| Mezz | 12% |
| Preferred equity | 8% |
| Common equity | 15% |
The layered structure of debt and equity financing that funds a real estate deal. From safest (senior debt) to riskiest (common equity), each layer has different priority, risk, and return.
Senior debt is paid first (interest, then principal in default). Mezz second. Preferred equity third. Common equity is paid last from whatever remains.
To optimize leverage without ceding too much equity to LP investors. Adding mezz and pref to senior debt lets sponsors do larger deals without diluting their equity stake or returns.
More leverage (deeper stack) generally amplifies sponsor returns but increases execution risk. The optimal stack balances return amplification against fragility.
The sponsor, in negotiation with each capital source. Senior lenders set their max LTV/LTC, mezz lenders set their max combined leverage, pref / common equity investors negotiate their return waterfalls. Sponsors quarterback the whole structure.
Matrix structures senior bridge, construction, and DSCR debt as the foundation of capital stacks that include mezz, pref, and common equity layers.
