Money & Finance › Commercial real estate lending
The capital stack: who gets paid first in a property deal
· Concept
Fact, law or dataA rule, statute, definition or measured number.
The layers of money in a property deal, ranked by who gets paid first and who loses first.
See it on the Money & Finance map →How it works
Picture a $20 million building. A senior mortgage might cover $12–13 million (60–65%). Mezzanine debt or a junior note can stretch the debt to about 75–80%. Preferred equity may fill a few more points, and the owner's common equity is the rest. Cash from rents, a sale or a foreclosure pays the senior lender first, then mezzanine, then preferred, and common equity last. Losses hit in reverse order. The riskier the layer, the higher the return it demands.
Why it matters
It shows at a glance how much cushion protects each investor. A 20% fall in value wipes out a 20% equity slice but leaves a 60% senior loan untouched.
Think of it like
Like lien priority on a title report: the first deed of trust is paid before the second, and the owner keeps what is left.
Facts, rules and data
Loan documents, intercreditor agreements and recorded deeds of trust set the order; state lien-priority law and bankruptcy's absolute-priority rule enforce it.
Debates and risks
In a downturn, mezzanine and preferred investors often fight over who controls a troubled building, and how to value the middle layers is contested.
Inside this (4)
Connections (3)
▸The capital stack: who gets paid first in a property deal shows how much a deal uses Leverage: amplifying gains and losses with debtFact, law or data
The connection
The stack measures leverage directly: debt layers as a share of value. With a 65% loan, a 20% fall in value wipes out about 57% of the equity; with 80% combined debt, the same fall wipes out all of it. More debt raises returns on equity in good times and risk in bad.
When and why
In every financed property; leverage tends to peak before downturns, as in 2005–07, when some deals stacked debt to 85–90% of value.
How we know
The equity-loss math is arithmetic; CMBS loss data from 2009–12 show losses concentrated in the most highly leveraged deals.
Debates and risks
How much leverage is safe for each property type is judgment; lenders loosen standards in booms and tighten them after busts.
▸Senior debt: the first-lien mortgage, paid first sits at the bottom of The capital stack: who gets paid first in a property dealFact, law or data
The connection
Drawn as a tower, the stack puts the senior loan at the base because it is paid first and protected by every layer above it. Those layers absorb losses before the senior lender loses a dollar, which is why senior debt carries the lowest rate.
When and why
In every financed deal; senior loans typically cover 55–75% of value.
How we know
Recorded deeds of trust, title insurance and intercreditor agreements fix the senior lender's first claim.
Debates and risks
A C-PACE tax lien or a ground lease can rank ahead of the 'senior' loan, which surprises some owners and lenders.
▸Common equity: the sponsor's first-loss, all-upside slice is the first-loss layer of The capital stack: who gets paid first in a property dealFact, law or data
The connection
The capital stack pays in order: senior debt, then mezzanine, then preferred, then common. Common equity sits at the bottom, so it absorbs the first losses when value falls and keeps all remaining gain when value rises. Its thickness is the cushion protecting everyone above it.
When and why
In every leveraged property deal; common equity is typically about 25–40% of value, thinner in 2005–07 and thicker after 2022.
How we know
Loan documents, intercreditor agreements and lien-priority law fix the order; foreclosure outcomes show common equity wiped out first.
Debates and risks
How much cushion is 'enough' depends on how far values can fall, and the office slump since 2022 surprised many lenders.