Capital Stack

The capital stack is the complete structure of all capital sources funding a real estate investment, organized by priority of repayment. Senior debt sits at the bottom (lowest risk, first repaid), followed by mezzanine debt, preferred equity, and common equity at the top (highest risk, last repaid but highest return potential).

Senior debt (50-70%): bank mortgage, lowest interest rate, first claim on assets

Mezzanine debt (10-15%): subordinated loan, higher interest, repaid after senior debt

Preferred equity (5-15%): equity with priority distributions and a preferred return

Common equity (10-30%): residual ownership, highest risk and highest upside

A AED 10,000,000 Dubai property acquisition: Senior mortgage AED 6,500,000 (65% LTV, 5% interest), mezzanine loan AED 1,500,000 (15%, 10% interest), preferred equity AED 1,000,000 (10%, 8% preferred return), common equity AED 1,000,000 (10%, residual returns).

UAE Central Bank LTV limits cap senior debt at 80% for expat buyers (properties under AED 5M) and 85% for UAE nationals. This shapes the capital stack for individual purchases. Institutional deals may use Islamic financing structures (murabaha, ijara) as alternatives to conventional debt layers.

Your position in the capital stack determines your risk and return profile. Senior debt investors take the least risk and earn the lowest return. Common equity investors at the top take the most risk but capture all upside above the debt and preferred layers. Understanding where your capital sits is fundamental to evaluating any real estate investment.

In a downturn, losses flow from the top of the stack downward. Common equity absorbs losses first, then preferred equity, then mezzanine, with senior debt the last to be impaired. The further up the stack your investment sits, the more quickly your capital is eroded in a stress scenario.