The capital stack for a multifamily development

A ground-up multifamily project is paid for from several layers of capital, each with its own priority, cost and conditions. The layers are set in the feasibility model, because the cost of each one changes the return on the others.

The layers, from first paid to last

• Senior construction loan: secured by the project, drawn as work is completed, then repaid by permanent financing or a sale.
• Mezzanine debt or preferred equity: a layer between the loan and the common equity, at a higher cost.
• Common equity: the investors' capital, typically split between a limited partner who funds most of it and a general partner who leads the project.

Affordable and public sources

A restricted project adds tax credit equity, tax-exempt bonds, soft loans from cities and states, and sometimes land contributed by a public owner. Each source brings its own covenant and compliance terms.

Why it matters before design

Lenders and investors set the thresholds a project must meet: the loan's size relative to cost and value, the return on equity, the timeline. The pathway and the program are chosen with those thresholds in view.

Questions

What is a capital stack in real estate development?

The layers of financing that pay for a project, ordered by who is repaid first: senior debt, mezzanine debt or preferred equity, then common equity.

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