What does the capital stack represent?

The capital stack represents the structure of financing for acquiring or improving a real estate asset. It outlines the different layers of funding used, which can include various sources from equity to debt. Each component within the capital stack has its own associated risk and return profile, reflecting where the investment sits in terms of priority for repayment and ownership rights.

Understanding the capital stack is crucial for investors and stakeholders in a real estate transaction as it helps them to assess the financial strategy and risk levels associated with the investment. Each layer in the stack typically has a specific order of priority; for instance, debt financing usually has a higher claim on assets in the event of liquidation, while equity investors take on more risk but also have the potential for higher returns.

Knowledge of how the capital stack functions allows investors to make informed decisions on how to structure their investments and what types of returns they can expect based on their level of involvement and risk tolerance.