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.
Frequently asked questions
What does "capital stacking" mean?
Capital stacking is the practice of layering several financing sources on one property instead of using a single loan plus the sponsor's own cash. Each layer — senior debt, mezzanine debt, preferred equity, common equity — carries a different repayment priority and price. The stack is the finished structure; stacking is the act of assembling it.
Who gets paid first in a capital stack?
Senior debt is paid first, then mezzanine debt, then preferred equity, and common equity last. That order governs operating cash flow and sale or refinance proceeds alike, and a foreclosure or workout follows the same sequence. Losses run in reverse: the top of the stack absorbs the first dollar of any shortfall.
What determines how much of the capital stack a senior lender will fund?
The senior tranche is sized by whichever constraint binds first — loan-to-value, debt service coverage, or debt yield. Relendi's underwriting benchmarks cap stabilized LTV at 75% and require a DSCR of at least 1.25x, so the senior layer on a stabilized deal typically covers roughly two-thirds to three-quarters of total capitalization.
How is the capital stack different from LTV?
LTV measures one layer: the senior loan against appraised value. The capital stack describes every layer of capital behind the deal and the order in which each is repaid. A property can sit at a conservative 65% LTV and still carry far higher total leverage once mezzanine debt and preferred equity are counted above the mortgage.
Does every capital stack include mezzanine debt and preferred equity?
No. Most commercial deals use just two layers — a senior mortgage and the sponsor's common equity. Subordinate layers appear when a sponsor wants leverage beyond what the senior lender will fund, and each one adds cost, another party's consent right, and an intercreditor negotiation. Simpler stacks are typically faster to close.