Guide

Commercial Real Estate Capital Stack

How operators think about senior debt, mezzanine debt, preferred equity, and common equity — and why disciplined capital stacking protects every dollar in the deal.

What It Is

Capital Is a Stack, Not a Pool

The commercial real estate capital stack is the ordered structure of financing used to acquire, develop, or reposition a property. Each layer has a different priority of payment, a different risk profile, and a different expected return.

Understanding the capital stack matters whether you're a sponsor raising money, an operator deciding how much debt to take on, or an investor evaluating where your capital sits in the waterfall. The same asset can look safe or speculative depending on how it is capitalized.

At ZONIQ, we evaluate every deal from a loss-first perspective. We structure the stack so that each position — from senior lender to common equity — is appropriate for the asset's actual risk.

The Four Layers

Senior Debt to Common Equity

Each layer sits below the next in priority. The higher you are in the stack, the safer your principal — and the lower your return. The lower you are, the more risk you take for more upside.

Senior Debt

Risk: Lowest risk in the capital stack. Secured by a first-position mortgage or deed of trust on the property.
Return Profile: Fixed coupon paid before any distributions. Returns are typically in the single digits, priced off a spread to an index.
How ZONIQ Thinks About It: We keep senior LTV conservative — usually well below the max a lender will underwrite — so the asset has room to absorb revenue volatility without tripping a covenant or risking a technical default.

Mezzanine Debt

Risk: Subordinated to senior debt. Higher yield because it sits in the loss gap between first-lien proceeds and the equity cushion.
Return Profile: Contractual coupon plus points, often with a current-pay component and accrued portion. Returns sit between senior debt and equity.
How ZONIQ Thinks About It: We only use mezzanine when the asset's cash flow can comfortably cover both senior and mezzanine payments under stressed scenarios. We model two years of downside before signing.

Preferred Equity

Risk: Equity in name, but structured like debt. Preferred investors get paid after debt service but before common equity and have limited participation in residual upside.
Return Profile: Fixed or cumulative preferred return, often 7–10% in today's market. The trade-off is upside participation in exchange for priority of distributions and sometimes liquidation preference.
How ZONIQ Thinks About It: Preferred equity is one of the structures we use most often for capital-preservation-oriented partners. We only accept it when the deal can pay the pref from in-place cash flow, not from a rosy pro forma.

Common Equity

Risk: Highest risk. Common equity is the first dollar lost and the last dollar paid out. It captures all residual upside after debt, mezzanine, and preferred equity are satisfied.
Return Profile: Unlimited upside through appreciation, cash flow, and eventual sale. Expected returns are higher because common equity absorbs the most risk.
How ZONIQ Thinks About It: We treat our common equity like a lead investor would. We underwrite every deal assuming common equity takes a haircut, and we only move forward when the residual return still justifies the risk.

Protection

How We Protect Position Within the Stack

Underwrite to the Worst Case

Our models don't optimize for the pitch deck. We stress-test revenue at vacancy peaks, expenses above current run rates, and exit cap rates 50–100 basis points wider than today. If the capital stack still works in that environment, we proceed.

Match Structure to Risk

Capital stacking is not about maximizing leverage. It's about matching the right capital to the right risk. Heavy value-add or development deals get more equity and less senior leverage. Stabilized cash-flowing assets can support more debt.

Stress-Test the Waterfall

We build every distribution waterfall and model what happens if cash flows drop 20%, 30%, or 40%. We want to know exactly who gets paid, who accrues, and who takes the first loss before we commit capital or invite partners.

Reserve Discipline

We don't sweep every dollar to investors. Capital reserves for repairs, tenant improvements, and debt service are part of the stack, not an afterthought. Reserves protect every layer above them.

Sponsor Alignment

We structure operator and sponsor economics so that everyone loses if the deal loses. No promote without a hurdle, no preferred return that relies on optimistic rent growth, and no misaligned fee structures that reward activity over outcome.

Preferred Equity

A Structure Built for Capital Preservation

Our preferred equity structures are designed for partners who want priority distributions and downside protection without taking on the full risk of common equity. We only offer them on deals where the in-place cash flow can support the preferred return.

Explore Partnership Structures

Typical Terms

Preferred return: 7–10% depending on asset risk
Current-pay structure where supported by cash flow
Liquidation preference before common equity
Participation rights negotiated deal-by-deal

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We share acquisition strategy, capital stack thinking, and deal flow updates with a selective group of partners.

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