Foundation // Lesson 03

The Capital Stack

Definition: Hierarchy of Payment

The "Capital Stack" is the structure of all capital invested into a property. It defines the order in which cash flow is distributed and who takes the first loss if the asset loses value.

Visualizing the Stack

COMMON EQUITY (First Loss / Highest Return)

MEZZANINE DEBT / PREF EQUITY

SENIOR SECURED DEBT (Last Loss / Safest)

Senior debt is paid first. Equity is paid last. However, equity captures all the "upside" (profit) once the debt is serviced.

Why it Matters: Risk Management

Institutional investors optimize the stack to maximize returns relative to risk. Tokenized real estate typically focuses on the Equity layer, as it allows for the highest potential appreciation and yield capture for the protocol.

Knowledge Checkpoint

1. Who is paid first in the capital stack?

Common Equity Senior Secured Debt Mezzanine Investors

2. Which layer of the capital stack captures the "upside" profit from property appreciation?

Common Equity Senior Debt The Property Manager

3. What does "First Loss" mean in the context of the capital stack?

The lender loses money first The equity holder's investment is reduced first if value drops The government loses tax revenue first