A capital stack is a visual representation illustrating the position of cash within a property’s capitalization, i.e., how the debt or equity – or a combination thereof is broken out. As a rule, debt in a transaction is senior in priority to equity, whereby its position is first to be repaid and the most protected should property values fall. All the equity in a transaction would have to be eliminated before a debt’s position would be adversely affected. This is referred to as an equity cushion. Due to the inherent safety of this position within the capital stack, yields for debt are generally lower than that of equity with a stated return and excess cash flowing to equity partners.
Read the full story