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.