The layers, and what each one is actually buying
A real estate capital stack is usually described as a return ladder: senior debt cheapest, common equity most expensive. That framing hides the operating reality. Each layer buys a bundle of rights — information, consent, cure, remedy and, in some cases, replacement of the sponsor.
Senior debt buys collateral and covenants. Mezzanine typically buys a pledge of the equity interests in the property-owning entity, which allows a faster remedy than foreclosure on real property. Preferred equity buys a priority return and, commonly, forced-sale or change-of-control rights after a trigger. Common equity buys residual upside and takes the first loss.
- Senior debt: covenants, reserves, lender consent on transfers, cash management triggers.
- Mezzanine: equity pledge, intercreditor terms, accelerated remedies on default.
- Preferred equity: accrual mechanics, redemption dates, forced-sale and removal triggers.
- Common equity / LP capital: economic residual, limited consent rights, usually no operating control.
Where control actually moves
Sponsors lose control in predictable places. A missed redemption date on preferred equity converts a financing partner into a decision maker. A cash management trigger on the senior loan diverts distributions before the sponsor sees them. A cross-defaulted guarantee ties one asset's problem to an unrelated asset.
None of these terms are unreasonable in isolation. The problem is that they are negotiated by different parties at different times, and no one models what happens when two of them fire in the same quarter.
Model the downside, not the pitch
Underwriting that only clears in the base case is not underwriting; it is a marketing exercise. Before signing a term sheet, run the stack against a delayed lease-up, a slower exit, a rate reset and a construction overrun — separately and together.
The question is not whether returns compress. It is who holds the pen when they do, and whether the sponsor can still fund a cure without an emergency raise on hostile terms.
- What is the cure amount at the first covenant breach, and where does that cash come from?
- Which layer can force a sale, and how many days of notice does the sponsor get?
- Does a downside case trigger a capital call the existing LP base can realistically fund?
- Are guarantees recourse to the sponsor personally, and are they cross-collateralised?
How to present the stack to investors
Sophisticated investors do not object to leverage; they object to surprises. A clear stack summary — layer, size, cost, priority, key rights, key triggers — moves diligence faster than a polished return chart.
Where the deal is offered as a private placement, the presentation of structure and risk sits alongside the offering documents prepared by securities counsel. Marketing materials should not contradict, summarise loosely, or soften what the documents say.
The sequence that keeps options open
Sponsors who keep control tend to work the stack top-down and terms-first: size the senior credibly, decide how much structured capital the asset can survive, and only then decide how much common equity to raise and at what promote.
Reversing that order — raising equity first and fitting debt to it — produces stacks that are efficient on paper and fragile in operation.