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The capital stack refers to the sequence of priorities different stakeholders have on a real estate project.
Those positioned in higher priorities would carry higher risks and therefore higher returns, while those at the lower end would carry a lesser risk with lower returns.
The capital stack of real estate investments is typically arranged as follows, from top to bottom.
- Sponsor equity
- Preferred equity
- Mezzanine financing
- Second and subsequent mortgages
- First mortgage
- Real estate taxes
Understanding the capital stack of a project helps investors determine where they stand in a project, and their legal rights that accompanies their position in the hierarchy.
It would imply who has a higher priority, who gets payments first, and the order of priority should a project go into liquidation.
It should be noted that if taxes are not paid, there is always the possibility that a lien would be placed on the property. And the new owner would be liable for it should the project be sold or repossessed.