If you’re planning to invest in commercial real estate in the USA, understanding the Capital Stack is essential. It’s one of the most important concepts in real estate finance—and knowing how it works can help you close more deals, make smarter decisions, and ultimately protect your investment.
Let’s break it down.
What Is the Capital Stack?
The Capital Stack refers to the different layers of financing that make up a real estate deal. Each layer comes with its own risk, reward, and priority when it comes to how profits (or losses) are distributed.
From the top (least risky) to the bottom (most risky), the capital stack typically looks like this:
- Senior Loan
- Mezzanine Debt
- Preferred Equity
- Common Equity
Here’s how each layer works:
1. Senior Loan (Least Risk, Lowest Return)
This is typically a bank loan and has the highest priority in the capital stack. That means the lender gets paid first. Because it’s the most secure position, it usually comes with the lowest interest rate.
2. Mezzanine Debt
This comes after the senior loan in priority and is typically provided by non-bank lenders. It carries more risk than the senior loan, so it comes with a higher interest rate. Mezzanine lenders usually have the right to take over the senior loan if payments are missed to protect their position.
3. Preferred Equity
These are investors who put in capital but don’t have control over operations. They get paid after the debt is serviced, but before common equity holders. Because they’re taking more risk, they expect a higher return—often 10% or more.
4. Common Equity (Most Risk, Highest Potential Reward)
This is where you, the sponsor or active investor, typically sit. You’re the last to get paid—but if the deal performs well, you get the biggest upside. You’re also the first to take a hit if things go sideways.
Real-World Example
Let’s say you’re doing a $10 million deal.
- A bank offers you 50% in a Senior Loan ($5M)
- A private lender offers 20% in Mezzanine Debt ($2M)
- You raise another 20% from friends, family, or investors as Preferred Equity ($2M)
- You put in the final 10% as Common Equity ($1M)
Now the capital stack is complete, and you’ve got the funds to close.
But here’s the key: the deal has to perform well enough to cover everyone lower in the stack. That means paying the debt, preferred returns, and then having enough profit left for you as the common equity holder.
When Is This Structure Used?
A layered capital stack is most common in value-add or turnaround deals—situations where the property needs work, but you believe you can increase its value significantly.
For example:
You purchase a property with low occupancy, invest in renovations and better management, and increase occupancy to 90%+ over two years. Then, you refinance the property at its new, higher value—often at lower interest rates.
In some cases, you may be able to refinance for more than the original capital stack, letting you cash out some equity to reinvest into your next deal.
Important Reminder
Be careful not to over-leverage your deal. Too much debt might make your deal look better on paper, but it adds risk. If things don’t go perfectly, you could end up in default—or worse, lose the property entirely.
Want to Learn More?
Check out this in-depth guide to the capital stack:
👉 Everything You Need to Know About the Capital Stack
We love working with foreign nationals investing in U.S. commercial real estate—and helping them get the financing they need to succeed. We’re not just lenders—we’re investors and developers ourselves, so we understand what it takes to make a deal work.
Give us a call and let’s talk about your next deal.
Lance Langenhoven
Head of Commercial Lending
