What is a capital stack, and why is it important in financing a CRE project?

• A. The sum of all property taxes due over the investment period.
• B. The schedule of loan maturities and deadlines for debt service.
• C. The layering of debt and equity (senior debt, mezzanine, equity); determines risk/return, control, and waterfall.
• D. The annual accounting method used for capitalization.

Answer: (C)

Capital stack is the layering of financing used to fund a commercial real estate project, from senior debt at the bottom through mezzanine debt and up to equity. This structure sets who is repaid first and who bears the most risk, which in turn shapes the potential returns. Senior debt is secured, carries the lowest risk, and typically has covenants; it gets paid first from cash flow and sale proceeds. Mezzanine debt sits above senior debt, is more expensive, and carries higher risk, often with an equity kicker to participate in upside. Equity is the residual claimant, taking on the most risk but also the potential for the largest upside once all debt obligations are satisfied. The waterfall describes how profits are distributed: debt service and repayment to lenders come first, then any return to mezzanine lenders, and finally the remaining profits to equity. This framework affects leverage, control rights, and the overall feasibility of the project.