Capital Stack is a term that gets used a lot in our industry but is not well understood by many brokers new to commercial finance. In a commercial transaction, there is usually a mix of types of financing that combine to create the capital stack. If you were to look at a diagram of the capital stack you would find that as you worked your way up the stack, the financing becomes more risky to the investor and thus requires a greater return.
- Senior Debt - At the very bottom of the capital stack is senior debt. Senior debt usually makes up 50-70% of the capital stack. Senior debt can include fixed rate loans, floating rate loans, construction loans, bridge loans and hard money loans.
- Mezzanine Debt - In the middle of the capital stack is mezzanine debt. Mezzanine debt is subordinate to senior debt, so the risk is higher to the lender. Mezzanine debt is typically used to add additional leverage beyond the 50-70% provided by the senior debt. Adding an equity component to the mezzanine debt results in a participating loan or hybrid mezzanine loan.
- Equity Financing - At the top of the capital stack is equity financing. Equity is different from debt in that the investor participates in the success of the project being financed for a set period of time. Equity capital can include preferred equity, joint venture equity and/or sponsor equity.
As a commercial loan broker, your clients count on you to help them secure the financing they need from options across the capital stack.
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