What does the term "Capital Stack" refer to in real estate finance?

The term "Capital Stack" refers to the structure of financial sources used to fund a real estate project. In real estate finance, the capital stack represents the various layers of capital that come together to finance an acquisition or development, each with its own risk and return profile. It typically includes a mix of equity and debt, where equity is listed at the top of the stack because it is the riskiest form of capital but also has the potential for higher returns. Below equity, different types of debt can be layered according to their seniority, such as senior loans, mezzanine financing, and other subordinate debt instruments.

Understanding the capital stack is crucial for real estate investors and developers, as it helps them assess financing options, allocate risks, and determine the structure that will likely yield the desired financial outcomes for a project. This concept is foundational to navigating real estate finance, as it directly impacts how investments are structured and how returns are distributed among investors.