Understanding the Capital Stack: A Passive Investor’s Guide

When you invest in commercial real estate, you’re not just buying into a property — you’re buying into a financial structure. That structure is called the capital stack, and it defines who gets paid, when, and how much.

For passive investors, understanding the capital stack is one of the simplest yet most powerful ways to gauge the risk and reward profile of any deal.

What Is the Capital Stack?

The capital stack represents the layers of financing that make up a real estate project. Each layer has its own priority for repayment and its own risk-return tradeoff.

Here’s a quick breakdown:

1. Senior Debt

   • Position: First in line to be repaid

   • Risk: Lowest

   • Return: Fixed interest payments, no profit share

2. Mezzanine Debt

   • Position: Behind senior debt, ahead of equity

   • Risk: Moderate

   • Return: Higher than senior debt, often includes warrants or equity pledges

3. Preferred Equity

   • Position: Ahead of common equity but below debt

   • Risk: Higher than debt, lower than common equity

   • Return: Fixed or capped return, sometimes with limited upside

4. Common Equity

   • Position: Last in line, only paid after all others

   • Risk: Highest

   • Return: Largest upside, participates in profit splits and appreciation

     
     

Where Passive Investors Usually Sit

In most syndications and private real estate deals, passive investors are common equity holders. That means:

• You take on the most risk (paid last).

• You also capture the greatest upside if the property performs well.

  
  

This position is why syndication investments often target double-digit returns — you’re trading liquidity and repayment priority for higher long-term growth potential.

Why the Capital Stack Matters

Understanding the capital stack helps you answer critical questions:

• Am I being compensated fairly for my risk?

• Does the deal structure favor the sponsor more than the investors?

• What happens to my returns if the project underperforms?

Quick Takeaway for Investors

Before you commit capital, always ask the sponsor:👉 “Where am I in the capital stack, and what rights or protections come with that position?”

That simple question can help you avoid unnecessary risk and make smarter decisions as a passive investor.

Final Thoughts

The capital stack may sound technical, but it’s simply a roadmap of who gets paid and when. As a passive investor, knowing your position in that roadmap can give you the confidence to evaluate deals, compare opportunities, and protect your capital.

At One-9 Holdings, we believe education is a core part of investing. That’s why we break down concepts like the capital stack so you can make informed, confident decisions with your money.

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