Capital Stack
Definition:
The Capital Stack refers to the structure of financial layers used to fund a real estate investment, typically including senior debt, mezzanine debt, preferred equity, and common equity. Each layer of the capital stack comes with different levels of risk and return, with senior debt being the most secure and common equity being the most volatile but potentially lucrative.
🔍 Did You Know?
Understanding the capital stack is crucial for institutional investors, as it determines the order in which stakeholders are repaid in the event of a liquidation or sale of the property.
Examples:
Example 1:
In a $50 million commercial development, the capital stack consists of $30 million in senior debt, $10 million in mezzanine financing, $5 million in preferred equity, and $5 million in common equity.
Example 2:
A real estate syndication raises capital for a new project with a capital stack that includes 70% senior debt, 15% preferred equity, and 15% common equity, each with different risk and return profiles.
Why It’s Important:
The capital stack outlines the hierarchy of risk and reward in a real estate investment. Institutional investors must understand the capital stack to assess their position in terms of potential returns and exposure to risk.
Who Should Care:
- Institutional investors involved in complex real estate transactions.
- Developers raising capital from multiple sources.
- Lenders securing their position in the capital stack to minimize risk.
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