Companion to: Real Estate Decoded Chapter 38 (Capital Stack) - Workbook tab (workbook common framework)
Inputs
Outputs
Senior debt
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Mezzanine debt
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Preferred equity
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Common equity
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Common equity (% of total)
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Weighted Average Cost of Capital
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How to read this tool: The capital stack is the layered structure that funds every institutional real-estate deal. Senior at the bottom (lowest cost, lowest risk, first paid). Mezzanine above senior. Preferred equity above mezz. Common equity at the top (residual claim). WACC = sum of each tranche's percentage times its required return. Lower WACC = better levered IRR potential.
What this tool is for
Capital-stack design is the institutional-real-estate finance professional's primary craft. The trade-off: more cheap debt lowers WACC and amplifies common-equity returns but raises default risk. The institutional sweet spot for stabilized assets: 55-65% senior, 10-15% mezz, 5-10% preferred, 20-30% common. For value-add: less senior, more equity. For development: even less senior, often no mezz, more sponsor-recourse equity.
Benchmarks the practitioner watches
- Stabilized institutional: 55-65% senior / 10-15% mezz / 5-10% pref / 20-30% common
- Value-add: 50-60% senior / 5-10% mezz / 30-40% common
- Development: 55-65% construction loan / 35-45% sponsor equity
- WACC stabilized institutional: 7-9% current cycle
- WACC value-add: 9-11% current cycle
Common mistakes
- Maximizing senior debt without modeling DSCR sensitivity to NOI compression
- Treating preferred equity as cheap debt - the legal-form matters in default
- Missing the intercreditor friction between senior and mezz in workout scenarios
- Underwriting common equity at sponsor-promote-grossed-up returns rather than LP-net
Educational reference only. Not investment, tax, legal, or real-estate advice. Confirm market-specific cap rates, lender terms, and tax overlay with your own advisors before acting.