Capital Stack
The capital stack is the order of money in a deal: senior debt, junior debt, preferred equity, common equity, and sometimes seller financing. It tells you who gets paid first and who absorbs losses first.
Why it matters
capital stack changes what a disciplined buyer can pay, how much debt the asset can safely carry, and whether the return is coming from operations or fragile assumptions.
Formula
Total sources = senior debt + junior debt + preferred equity + common equity + seller financing. Loan-to-cost = total debt / total cost.Worked example
A $5M acquisition uses $3.25M senior debt, $500k VTB, $250k preferred equity, and $1M common equity. The common equity has the highest upside but is first to take losses.
How investors read it
Use it to kill bad deals quickly. If the back-of-envelope version does not survive conservative assumptions, do not spend five hours making it look alive.
Common mistakes
- · Treating the metric as a verdict instead of a screen.
- · Using broker-package assumptions without checking the source documents.
- · Ignoring taxes, capex, vacancy, financing terms, and timing.
Use current local data and source documents. Realist should show assumptions and date-stamp market inputs because stale inputs create fake precision.