The Capital Stack orders the seniority of claims to the collateral and cash waterfall of an entity, such as a property or business, and is an effective tool to visualize risk and relative return based on an investment position.
An investment on the debt side of the Capital Stack has less risk compared to an investment on the equity side.
As it relates to real estate, the Capital Stack can generally be viewed as:
- Senior Debt (Secured, right to foreclose)
- Junior Debt (Mezzanine Debt, secured or unsecured, in some cases may foreclose or buy out senior debt)
- Preferred Equity (Unsecured, often referred to as mezzanine funding)
- Equity (Unsecured)
Additional Resource: The Capital Stack