Capital Stack
The capital stack is the layered combination of financing sources behind a commercial real estate deal, ranked by repayment priority: senior debt at the bottom, then mezzanine debt, then preferred equity, then common equity at the top. Lower layers carry lower risk and lower return; each layer is repaid in full before the layer above it sees a dollar.
Priority governs both operating cash flow — senior debt service is paid first, common equity distributions last — and capital events like a sale or refinance, where proceeds waterfall down from senior debt to common equity. A shortfall hits the top of the stack first.
Sponsors layer subordinate capital to shrink how much common equity they must contribute, but each added layer raises the deal's blended cost of capital and its effective leverage relative to a stack built mostly of senior debt and common equity.
A typical stack might run 60% senior debt, 15% mezzanine debt, 10% preferred equity, and 15% common equity.