Raising capital for commercial real estate is about structuring financing to make the deal secure, scalable, and attractive to everyone involved. The challenge is that capital markets are still selective. Trepp reports that CMBS office loan delinquencies recently hit 11.76% last August, signaling tighter scrutiny and less tolerance for risk in today’s environment.
So deals are failing because the capital stack isn’t structured correctly. That’s where understanding the real estate capital stack becomes essential.
The capital stack lays out how funding is layered, who gets paid first, who carries the most risk, and how returns are distributed. Once you understand it, raising money, negotiating terms, and evaluating risk stop feeling opaque, and start feeling like strategic decisions you can control.
In this blog, we will break down each layer in plain language so you can apply it to real investment decisions, not just theory.
What Is a Capital Stack?
A capital stack is the framework that explains how a commercial real estate project is financed and how each participant gets paid. It outlines the layers of capital used in a deal, ranging from the safest senior debt at the bottom to the highest-risk equity at the top.
Think of it as a priority ladder:
- The lower you are in the stack → the safer the position and the lower the expected return
- The higher you are in the stack → the riskier the position and the higher the potential return
Lenders, investors, and operators rely on the capital stack to evaluate:
- How risk is allocated
- Who controls decisions
- How returns flow if the project succeeds or fails
Understanding the capital stack helps investors negotiate terms, measure exposure, and build structures that make financing more achievable and deals more attractive.
The Layers of Capital Stack
Every commercial real estate deal relies on a blend of financing sources, and each carries its own position, expectations, and payout priority. The capital stack creates structure around these roles so everyone involved understands where they stand if the project performs well and what happens if it doesn’t.
The order matters because repayment flows from bottom to top: the lowest layer gets paid first, while the highest layer absorbs risk in exchange for higher return potential.
Senior Debt (Lowest Risk)
Senior debt sits at the foundation of most capital stacks. Banks and institutional lenders commonly provide this layer because it offers predictable income and holds the first lien on the property.
If anything goes wrong, like missed payments, default, or liquidation, senior debt gets paid before every other participant in the stack. Since repayment priority is high and collateral backs the loan, interest rates are typically the lowest of all financing sources.
Mezzanine Debt (Moderate Risk)
Mezzanine financing fills the gap between senior debt and equity. It increases leverage without requiring full equity funding, giving developers more financial flexibility. Unlike senior debt, mezzanine lenders don’t hold the first lien, making their position riskier.
To compensate, rates are higher, and terms may include warrants or equity-like features. If a project succeeds, mezzanine debt delivers meaningful returns, but in distress, it may convert to equity or sit behind senior debt during repayment.
Preferred Equity (High Risk)
Preferred equity sits above mezzanine financing and below common equity in the stack. It behaves like a hybrid: not quite a loan, but not fully ownership either. Investors in this layer earn a fixed return before common equity receives anything, but they don’t enjoy the same protections that lenders do. Preferred equity often participates in upside performance and may have rights tied to decision-making or governance if milestones aren’t met.
Common Equity (Highest Risk, Highest Reward)
Common equity occupies the top of the capital stack and carries the most exposure. These investors benefit last in repayment priority, yet they stand to gain the most if the project performs above expectations. Common equity holders are true owners, sharing in appreciation, revenue upside, and long-term value. Because their return isn’t guaranteed, common equity requires confidence in the asset, strategy, and operator.
Why Does the Capital Stack Matter for Investors and Developers?
The structure determines how control, payouts, and risk are distributed throughout a deal. When markets fluctuate, interest rates shift, or a project runs over budget, the capital stack serves as the blueprint for who absorbs impact and who gets protected.
A well-structured stack can make a project fundable; a poorly aligned one can stall deals or erode investor confidence. The stack also influences returns. Investors closer to the top may earn higher potential upside, while those toward the base prioritize stability and repayment certainty. Developers rely on this balance to secure financing without diluting ownership more than necessary.
Making intentional decisions about capital sources protects profitability and ensures financing aligns with the project strategy, whether the goal is long-term cash flow, quick stabilization, or ground-up development.
How Different Capital Stack Structures Affect Returns and Risk
Not all projects use the same capital mix. The structure determines who carries risk, how returns are distributed, and how much leverage a project uses. A highly leveraged capital stack may allow a sponsor to contribute less equity, but it can also increase repayment pressure and exposure during downturns. A more conservative stack may reduce financing strain but dilute upside returns.
The right balance depends on the project’s timeline, stability, and income predictability.
Below is a simplified comparison showing how varying capital stack structures influence performance:
| Capital Stack Structure | Debt-to-Equity Ratio | Investor Risk | Expected Returns | Cash Flow Pressure | Best Use Case |
| Conservative Stack | 50–60% debt / 40–50% equity | Low | Moderate | Low | Core, stabilized assets or long-term holds |
| Balanced Stack | 65–75% debt / 25–35% equity | Moderate | Higher than core equity | Moderate | Value-add or light renovation deals |
| Value-add or light renovation deals | 80–90% debt / 10–20% equity | High | Higher potential upside | High | Ground-up development or repositioning |
| Highly Structured Stack | 90%+ debt participation across layers | Very High | Very High(if executed successfully) | Very High | Opportunistic deals or complex financing environments |
How to Read and Evaluate a Capital Stack as an Investor or Borrower
A capital stack is a map for who gets paid, how risk is shared, and what kind of financial outcome is realistic. Evaluating it helps you understand the protections in place, where your position sits in the hierarchy, and how the structure aligns with the project’s income strategy and exit timeline.
When reviewing a capital stack, focus on the fundamentals:
What to Examine Closely:
- Debt-to-Equity Ratio: Reveals how much leverage the project carries and how sensitive it may be to shifts in income or interest rates.
- Loan-to-Value (LTV): Indicates how much of the property value is financed and how secure the lender’s position is.
- Fixed Interest vs. Variable Returns: Debt offers predictable repayment. Equity depends on project performance.
- Seniority Structure: Shows who gets paid first, who absorbs risk, and who has control rights in the deal.
Major Questions to Ask Before Committing:
- Who has the first claim to repayment if something goes wrong?
- What does success look like, and who benefits most when the deal performs well?
- How are delays, overruns, or income shortfalls handled?
- Do I have voting rights, reporting access, or decision influence?
The capital stack directly shapes financing flexibility, investor exposure, and overall return potential. A transparent, well-structured stack supports long-term performance and aligns incentives, while a poorly balanced one can create unnecessary risk, even in otherwise strong projects.
Strengthen Your Capital Stack with Bluestone Commercial Capital
The capital stack shapes everything, from risk exposure to investor payouts and long-term financing flexibility. Understanding it puts you in a stronger position when negotiating terms, raising capital, or evaluating opportunities. But the right knowledge is only part of the equation. Execution requires a lender who moves quickly, communicates clearly, and understands real-world deal timelines.
At Bluestone Commercial Capital, we help investors move forward with financing solutions built for momentum, including:
- Bridge loans for fast acquisitions
- Fix-and-flip financing for value-add projects
- Flexible short-term lending for transitional properties
If you’re evaluating a deal and need financing that supports speed and strategy, our team is here to help.
Let’s talk through your project and determine the best path forward.