The capital stack is the ordered list of everyone whose money is in a deal and who gets paid back first: senior debt at the bottom, then any secondary debt, then preferred equity, then common equity on top. Position in the stack is position in line during trouble. Higher positions earn more because they are paid last, and every development conversation eventually becomes a conversation about this order.
Total project capital=Senior debt + Secondary debt + Preferred equity + Common equity
- Senior debt
- The first-position loan, repaid before every layer above it.
- Secondary debt
- Mezzanine or seller financing, behind the senior loan.
- Preferred equity
- Equity with a stated return, paid before common equity.
- Common equity
- The sponsor's and the partners' capital, repaid last.
- An order of repayment, not just a list of money. Position decides who absorbs the first loss.
- Blind to the quality of the deal. A good position in a bad project still loses, only later than the others.
- The promised return rises up the stack because it is payment for being paid last, not for being smarter.
- When a partner comes in, where they sit matters more than the return they were quoted.
The same nine-unit project, $2.2M to build, funded in three layers.
If the project finishes $400,000 short, the common equity is gone before the preferred loses a single dollar.
Related terms
All termsLeverage
Leverage is using borrowed money to control a larger asset than cash alone would buy.
DevelopmentLand Residual Value
Land residual value is what a developer can rationally pay for a site: the value of the finished project, minus every cost to build it, minus the profit the risk demands.
FinanceLTV (Loan-to-Value)
Loan-to-value is the loan amount divided by the property's value.
Terms arrive with the writing.
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