Which of the following is typically the largest piece of the capital stack?

• A. Senior Debt
• B. Mezzanine Debt
• C. Common Equity
• D. Preferred Equity

Answer: (A)

In real estate financing, money is raised in layers from the top of the stack down by priority of claim. The top layer, secured by the property and first in line to be repaid from cash flows or a sale, carries the lowest risk for lenders. Because it can fund the bulk of the project at a relatively low cost, this layer is typically the largest piece of the capital stack.

Mezzanine debt sits below senior debt. It fills gaps but comes with higher risk and cost, so the amount allocated is usually smaller than the senior debt portion. Preferred equity lives above common equity and has priority to distributions, but it still represents a minority position compared with the debt financing, and is more expensive than senior debt as well. Common equity is the residual ownership stake—the last to be paid and the most exposed to risk—so it tends to be the smallest portion in a typical deal.

So, because it’s secured, lowest risk, and financed at the lowest cost, the senior debt portion is the largest piece of the capital stack. For example, a $100 million project might commonly be funded with around $70 million of senior debt, plus smaller amounts of mezzanine or preferred debt and some equity.