What is a Capital Stack in Commercial Real Estate?
The capital stack for a real estate project refers to the various sources of funding that are used to finance the project. It is a hierarchy of the different types of capital that are used to pay for the acquisition, development, and construction of the property, as well as any ongoing operating expenses.
The capital stack is typically divided into different layers, each of which represents a different type of funding. The order in which the layers are listed reflects the priority of repayment, with higher priority layers being repaid before lower priority layers. The most common layers in a capital stack for a real estate project are:
Equity -This layer represents the capital that is contributed by the owner or developer of the property. It is typically the highest priority layer in the capital stack and is typically repaid first.
Mezzanine financing - This layer represents additional capital that is provided by investors or lenders, usually in the form of debt or equity. It is usually lower in the priority of repayment than the equity layer.
Senior debt - This layer represents the primary loan or mortgage on the property. It is typically the lowest priority layer in the capital stack, and is usually repaid last.
The capital stack for a real estate project can be complex, and the specific layers and priorities will vary depending on the circumstances of the project. It is important for real estate professionals and investors to understand the capital stack for a particular project in order to assess the risks and potential returns.
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