Glossary - Capital Stack
The capital stack refers to the hierarchical organization of all forms of capital used to finance a real estate project or company. This includes equity, preferred equity, mezzanine debt, and senior debt, ranked from riskiest to least risky. Each layer in the capital stack represents a different level of risk and potential return, with equity holders taking the most risk and potentially receiving the highest returns, while senior debt holders take the least risk and receive fixed interest payments.
Also known as
- Capital Structure
Use cases examples
- Real Estate Investment Prospectus: Our capital stack for the development project comprises 20% equity from investors, 30% preferred equity, 15% mezzanine debt, and 35% senior debt.
- Company Financial Structure Description: In our company's capital stack, the senior secured debt is at the lowest layer, providing the foundation with a secured claim on assets, followed by unsecured debt, preferred stock, and finally common equity at the top.
Considerations for investors
- The position within the capital stack determines the level of risk and the priority of claims in the event of a liquidation or exit, crucial factors in investment decision-making.
- Investors should carefully assess the entire capital structure of a potential investment to understand their risk-adjusted return potential, especially in ventures requiring complex financing arrangements.
Considerations for founders
- Understanding where your financing fits within the capital stack is crucial as it directly influences your obligations and the return expectations of investors.
- The structure of the capital stack may affect your company's operational flexibility, particularly in times of financial difficulty, due to the varying rights of different capital providers.
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