Asset Portfolio

The capital stack refers to the layers of capital involved in purchasing and operating a commercial real estate investment. It outlines the order in which different investors receive income and profits generated by the property. The typical capital stack consists of four sections arranged in the following order of priority:

• • Senior Debt: Senior debt holds the highest priority in the capital stack. These lenders are paid first before any other investors receive a return on their investment. They typically represent the mortgage lender or primary debt holder, with the strongest claim on the underlying asset. This position is considered less risky as the lender can take over the property through foreclosure in case of default.
  • Mezzanine Debt: Mezzanine debt holders are paid after all operating expenses and senior debt payments have been made. Similar to a second mortgage on a home, mezzanine debt generally offers a higher rate of return compared to senior debt.
  • Preferred Equity: Preferred equity is an intermediate position in the capital stack. It has evolved over time and can function similarly to subordinate debt or hold superior payment rights. It often receives a fixed return without a share of profits, but may have enhanced rights to take over the project in the event of default.
  • Common Equity: Common equity holders have the lowest priority in the capital stack. They typically include property operators, sponsors, and investor partners. Common equity holders get paid after all other components in the stack and preferred equity investors have received their agreed-upon returns. Although potentially the most profitable, common equity is also the riskiest part of the capital stack.