🏗️ What Is a Capital Stack in CRE? | Understanding the Building Blocks of Real Estate Finance 💰

💼 Breaking Down the Capital Stack: How Investors and Lenders Structure CRE Deals 🏢

🏢 What Is a Capital Stack in Commercial Real Estate (CRE)?

In commercial real estate (CRE), understanding the capital stack is essential — it’s the foundation that determines who gets paid first, who takes the most risk, and how returns are distributed. Whether you’re a developer, investor, or lender, knowing how a deal’s capital stack is structured gives you a clearer picture of potential risk and reward.

💡 What Is a Capital Stack?

The capital stack represents the hierarchy of all capital invested in a commercial real estate project — from debt to equity. Each “layer” of the stack carries different levels of risk, priority, and return. Generally, the lower the layer, the lower the risk — and the lower the potential return.

The four main layers include:

1.Senior Debt – The foundation of most deals. This is usually provided by banks or institutional lenders and has first claim on cash flow and collateral.

2.Mezzanine Debt – A higher-risk loan that sits between senior debt and equity. Mezz lenders often receive higher interest or warrants.

3.Preferred Equity – Investors here get priority over common equity but don’t have the same security as debt holders.

4.Common Equity – The riskiest but most rewarding position. Common equity investors are paid last but enjoy the upside of appreciation and profit.

📊 Why the Capital Stack Matters

Understanding the capital stack helps you:

·Gauge risk exposure — Know where your money sits in the repayment order.

·Negotiate better terms — Lenders and investors structure deals based on perceived risk.

·Plan your financing strategy — Optimize leverage by blending different layers effectively.

For mortgage brokers and investors, structuring the right capital stack can make or break a deal. At Medallion Funds, we help investors, developers, and business owners align their debt and equity structure to maximize returns while minimizing exposure.

🧮 Example: A Simple Capital Stack Breakdown

Let’s say you’re developing a $10M retail center:

·Senior Debt: $6M from a bank at 6%

·Mezzanine Debt: $1M from a private lender at 10%

·Preferred Equity: $1.5M from an investor group with an 8% preferred return

·Common Equity: $1.5M from the developer’s own funds

This layered approach allows the project to be financed efficiently while balancing risk and reward among stakeholders.

🧠 Pro Tip

Investors who understand how to blend capital sources — from traditional banks to private capital — gain a competitive advantage. They can close deals faster, negotiate better terms, and attract partners who value strong deal structuring.

⚙️ Final Thoughts

The capital stack isn’t just financial jargon — it’s the blueprint for every commercial real estate transaction. Knowing where you stand in the stack gives you clarity, control, and confidence in your investment decisions.

At Medallion Funds, we specialize in helping borrowers and investors structure winning capital stacks that align with their goals and risk tolerance.

📞 Schedule a strategy call today: BillRappOnline.com

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© 2023-2024 Bill Rapp, Medallion Funds LLC, Director of Capital Advisory