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The Real Estate Capital Rate Stack |
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Equity - Highly-leverage Mezzanine, Cash Equivalent Value - Entrepreneurial funds and risk profile. Any mezz loans at this stack level (the remaining 10% or less of the capital structure) will usually feature direct equity participation. |
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GREEN ZONE = Safe. Lower Yield and Principal Default Risk |
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YELLOW ZONE = Caution. Attractive Yield with Moderate Principal Repayment Risk |
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RED ZONE = Challenge. Greatest Risk/Reward Profile |
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Subordinated Debt - Mezzanine, Junior Mortgages, Participating Debt/Equity - Recorded (Junior) or unrecorded (1st and 2nd level mezz) debt, fully subordinate to senior debt. Typically co-terminus with senior loan, representing 65% to 90% of the capital stack. Additional precautions include direct “lock box” payments to subordinate lenders, in turn payments forwarded to senior debt lender., In other words, subordinated funding sources typically collect all payments from borrower and arrange for disbursements. Most often this part of the stack is structured as debt, although equity participations are more common structured as higher leverage is required. |
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Leverage Stack Senior Debt (A- and B-Piece) - First Mortgage position - For decades, senior level debt has been defined as 75% of value or lower. More recently underwriting standards have tightened with 65% being the new benchmark for maximum leverage.for commercial and 75% for multifamily. |
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Debt and Equity Yields Stack The debt and equity yields stack reflects a rate risk-and-return profile of up to 33% annual return. Debt yields range from about 6% to 10% for longer-term permanent loans (10 years +/-). |
