Money & Finance › Commercial real estate lending › The capital stack: who gets paid first in a property deal
Common equity: the sponsor's first-loss, all-upside slice
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
The owners' own cash in a property deal: paid last and lost first, but it keeps every dollar of gain once the others are paid.
See it on the Money & Finance map →How it works
Common equity is what the sponsor and its investors put in, often 25–40% of the cost. It gets what is left after debt service and any preferred return, and the sale profit after everyone above it is repaid. In a syndication a waterfall splits it: investors first get their capital back plus a preferred return, often 7–8%, then the sponsor takes a 'promote', say 20–30% of further profit. Value-add deals often target about 13–20% a year (IRR), with real risk of loss.
Why it matters
Leverage makes it volatile: with 65% debt, a 10% rise in value lifts the equity about 29%, and a 35% fall wipes it out.
Facts, rules and data
Operating agreements and private-placement memorandums set the waterfall; NCREIF and fund reports track realized equity returns, and foreclosure records show equity wiped out in downturns.
Debates and risks
Whether private real estate equity truly beats listed REITs after fees, leverage and smoothed appraisals is debated.
Connections (2)
▸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.
▸Common equity: the sponsor's first-loss, all-upside slice plays the same last-paid, unlimited-upside role as Stocks: owning a slice of a companyMainstream view
The connection
A shareholder, like a property's common equity, is paid after the company's lenders and other creditors and keeps any profit beyond. Both can lose everything, and both can multiply. The differences: stock trades daily with limited liability, while property equity is private, illiquid and may come with personal guarantees.
When and why
A general principle of corporate and partnership law, applying to listed companies and to the private LLCs that own buildings.
How solid is the link?
Bankruptcy's absolute-priority rule puts shareholders and LLC members last; Chapter 11 cases routinely wipe out both.
Debates and risks
Whether private property equity is really less volatile than stocks, or just appraised less often, is debated.