Capital Stack
Capital Stack in Practice
On a $20,000,000 acquisition, a senior lender funds 60 percent of cost, $12,000,000. A mezzanine lender adds $3,000,000, taking combined leverage to $15,000,000, or 75 percent of cost. A preferred equity investor contributes $2,000,000, bringing total outside capital to $17,000,000, or 85 percent. The sponsor's common equity fills the final $3,000,000. In a downside sale, proceeds repay the senior first, then mezzanine, then preferred, and the sponsor's $3,000,000 stands last in line.
Capital Stack: What the Market Actually Requires
Every commercial real estate transaction is a capital stack decision, whether the sponsor thinks of it that way or not. The senior layer is the cheapest money in the deal and comes from banks, life insurance companies, agency lenders, CMBS conduits, or debt funds, each with its own leverage ceiling. Life companies rarely stretch past 65 percent of value, banks cluster in the 60 to 70 percent range, and debt funds will push a stretch senior to 75 or 80 percent of cost on transitional deals. Everything the senior will not fund must come from more expensive layers above it.
Mezzanine debt and preferred equity fill the gap between senior proceeds and the equity a sponsor wants to invest. Mezzanine is a loan secured by a pledge of ownership interests in the property-owning entity, preferred equity is an investment inside the ownership structure itself, and both price well above senior debt because they absorb losses sooner. Debt funds and mortgage REITs dominate the mezzanine market, while family offices and institutional investors write most preferred equity checks. Common equity sits at the top: last to be paid, first to be wiped out, and the only layer with uncapped upside.
The sophisticated move is optimizing the blended cost of the whole stack rather than any single layer. A stretch senior from a debt fund often beats a bank loan plus mezzanine on both blended cost and execution risk, because one lender means one set of documents and no intercreditor negotiation. The most common sponsor mistake is the opposite instinct: chasing the cheapest senior quote, then discovering that the low-leverage lender forces an expensive mezzanine layer and a three-party intercreditor fight that delays closing by weeks.
Why It Matters for Your Loan
How you assemble the stack determines your equity check, your blended cost of capital, and who controls the deal when something goes wrong. Two structures with identical total leverage can have wildly different risk profiles depending on cure rights, control triggers, and intercreditor terms. Commercial Lending Solutions structures full stacks across 1,000+ senior, mezzanine, and preferred capital sources, and prices the stretch-senior alternative against every layered structure before recommending one.
Related Terms
Capital Stack: FAQ
Put This Knowledge to Work
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