Navigating the Capital Stack: Understanding Debt and Equity Financing in Commercial Real Estate

The success of any commercial real estate (CRE) project hinges on securing the right financing. One of the most critical concepts in this process is the “capital stack,” which defines the hierarchy of financial claims on a property. Understanding the structure of debt and equity financing is essential for developers, investors, and lenders. HALL Structured Finance, a leader in commercial real estate lending, plays a pivotal role in offering tailored financing solutions that support developers in navigating this complex landscape. 

The Capital Stack Explained 

The capital stack represents the layers of capital invested in a real estate project, each with different levels of risk and return. It typically consists of four primary components: 

• Common Equity:
  The most subordinate layer, common equity represents ownership stakes in the property. Investors in this tier assume the highest risk but also stand to gain the most if the project succeeds. Returns are distributed only after all other financial obligations are met. According to EquityMultiple, it is described as “the riskiest and most profitable portion of the real estate capital stack.” 

• Preferred Equity:
  Positioned above common equity, preferred equity investors receive fixed returns before common equity holders. While they may not have direct ownership control, they benefit from a more secure investment with prioritized distributions. 

• Mezzanine Debt:
  A hybrid between debt and equity, mezzanine debt generally offers annual yields around 12-20% (Finance Boston). These loans provide subordinated financing with the potential for conversion into equity if the borrower defaults. This layer carries higher interest rates due to its riskier position in the capital stack. 

• Senior Debt:
  The most secure form of financing; senior debt is typically provided by banks or institutional lenders. Senior lenders have the first claim on property assets and income, making this the least risky investment tier, usually accompanied by lower interest rates. Senior and unitranche private loans yielded 10-12% in Q3 2024, according to FEG’s Private Capital Quarterly. Meanwhile, direct lending to smaller companies offered gross yields around 11.4% in Q2 2024 per the Lincoln Senior Debt Index. 

Why the Capital Stack Matters 

In today’s market, understanding the capital stack is not just a technical necessity—it’s a strategic advantage. With over $1.2 trillion in CRE debt maturing by the end of 2025 (according to the Mortgage Bankers Association), developers and investors must be more financially agile than ever. Structuring the right blend of equity and debt is critical to mitigating risk, preserving control, and achieving strong returns. 

HALL Structured Finance continues to empower developers with flexible, high-leverage solutions tailored to specific project needs, having funded over $2 billion in construction loans across the country. As interest rates fluctuate and underwriting tightens, partnering with an experienced lender who understands every layer of the capital stack can be the difference between a stalled project and a successful one. 

Understanding your place in the capital stack helps align expectations, negotiate effectively, and ultimately secure the financing necessary to bring commercial real estate visions to life.