Capital Stack

The layered combination of debt and equity used to finance a deal, ranked by seniority and risk — from senior secured debt at the bottom to common equity at the top.

A typical capital stack for a real estate or corporate deal, from most senior to most junior: senior term loan, second lien debt, mezzanine debt, preferred equity, and common/LP equity. Each layer has a different risk/return profile and a different position in the waterfall if the deal underperforms.

Moving one lever in the stack — a rate, an advance rate, or a tranche size — changes blended cost of capital (WACC) and coverage ratios for every other layer, which is why capital stacks are best modeled as one connected structure rather than tranches calculated independently.