“Ask the Professor”
The financial structure (commonly known as the capital stack) in a real estate transaction is a very important concept in real estate finance. Most real estate assets employ different layers of funding. Each layer of funding represents a different level of risk and return.
The layers of funding which comprise the capital stack most commonly are: A) rent abatements, expense reimbursements, management fees & bank loans B) cash, tax credits, leasing commissions & home equity lines of credit C) rental revenues, expense adjustments, cash & tax losses D) equity, senior debt, preferred equity & mezzanine debt
Real estate assets are usually financed with a combination of equity and debt. Equity represents the ownership interest in the asset while debt usually represents the secured position given to a lender or investor to collateralize his investment in the asset. The equity does not have a specific rate of return or interest rate while the debt and preferred equity positions do. Each investment will have a different amount of equity and debt. The capital stack assists owners and investors to understand the risk and return features of each layer of equity and debt.
The correct answer is “D”.
Ronald M. Shapiro is Assistant Professor of Professional Practice in the Finance and Economics Department at Rutgers Business School of Newark and New Brunswick. He teaches real estate finance and serves as the director of student services for the Center for Real Estate. Prior to Rutgers Business School, Ron was SVP with Union Center National Bank (now Connect One) and served in executive management positions at Prudential Financial and Wells Fargo.