Mezzanine capital is a type of financing that’s comprised of part equity and part debt, which typically allows investors to seek higher than average returns . If you invest in mezzanine capital, you will be able to enjoy the best aspects of senior debt and equity. When looking specifically at the basic capital structure of a building or property, the top of the stack consists of equity holders, which include common equity and preferred equity holders. Below these two levels are mezzanine debt and senior debt.

If you make an investment into a property with senior debt, you take priority over anyone else within the capital stack. When the property performs well, you will be paid before anyone else with the interest payments that are received from the property. If the property doesn’t perform well, senior debt holders can start the foreclosure process or obtain ownership of the property in question. Holders of common equity often take on the most risk since they are paid last, which means that they may not be able to recoup their initial investment if the property fails. However, holders of equity and preferred equity are able to receive higher returns than anyone else in the capital stack. If the property performs well, common equity investors will receive regular payments from the cash flows of the property.

piggie bank with coins

Both mezzanine debt and preferred equity are forms of hybrid capital. While mezzanine debt isn’t secured by the property, it is secured by ownership interest. Holders of mezzanine debt do have some limited foreclosure rights as well. When you’re looking to invest your money into different properties, mezzanine debt often allows you to seek higher interest rates than senior debt holders. This form of debt usually comes with a shorter term of 6-24 months. Since you will also hold some of the borrower’s equity interest, you can foreclose on this portion of the property in the event that the borrower defaults. If you want to get started with real estate investing and are interested in taking on some mezzanine debt, the following article offers up a look at the basics of mezzanine capital.

What is Mezzanine Capital?

debt coins increasing

Mezzanine capital is a type of financing that’s made up of part equity and part debt. While senior debt holders use the property as collateral, the mezzanine capital investment is made against the property cash flow. Once you invest in mezzanine debt for a specific property, your returns will be largely dependent on the cash flow from the property in order to receive repayment for the principal of the loan.

This typically means that you will need to have patience when dealing with the borrower. While you’re taking on more risk than a senior debt holder, your returns will often be higher and can range from 12-18 percent each year. The equity from this investment usually comes in the form of a warrant, which allows you to purchase actual equity in the property at a later date. If the property happens to be highly successful, the equity that you purchase may provide you with high returns.

The best aspects of mezzanine capital include the regular cash returns that you should receive along with the potential for high returns over the length of the loan. Unlike preferred equity or common equity, this type of investment has low volatility and provides you with some protection in the event that the real estate project fails or the borrower files for bankruptcy. Since around 65 percent of the returns from a mezzanine investment are generated from the contractual interest that the borrower pays, the overall risk of the investment is reduced. Even if you don’t receive any return from the equity that you’ve purchased, most of your initial investment can be recouped with mezzanine capital.

Risks of Mezzanine Debt

chess game risk

There are several risks that you should be aware of when you invest in mezzanine debt. It’s important to understand that a mezzanine debt investment is going to be structured as a long-term investment, which means that there’s less liquidity with this investment type. It’s very difficult to liquidate a mezzanine debt loan until it has reached maturity. If the property fails, senior debt holders will have access to any remaining funds and assets before you.

If the borrower defaults on the property, the only protection that you have comes in the form of the guarantees that you initially received from the borrower. In general, this is the ideal investment type if you want to have a mixture of risk and consistent returns. While senior debt investments are safe, they don’t always garner high returns. If you invest in preferred or common equity, you may be taking on more risk than you’re comfortable with.

The primary characteristics of mezzanine capital include:

  • Investment is made against cash flow
  • Regular cash payments
  • Low volatility
  • Extensive downside protection
  • High returns
  • Warrants
  • Potential collaboration with senior debt holders

How Does Mezzanine Capital Work?

interior of restaurant

If you want to make an investment with a local restaurant, you will first need to identify how much operating income that they receive. Let’s say this operating income is $300,000 per year and that you receive a purchase offer from the owners for $1.2 million. If you don’t have this amount of money in your bank account, you could turn to a senior lender to contribute around $800,000 of the $1.2 million price tag. This would leave you with $400,000 in equity that you would need to pay. If you made this investment, you could receive more than 18 percent in yearly returns.

However, you can choose to reduce this equity by focusing on mezzanine debt. Of the remaining $400,000, you could find a lender to add more leverage above the senior debt holder. If they pitch in $200,000 of the remaining $400,000, this would leave you with $200,000 of equity. The mezzanine lender usually provides this financing at a rate of 12-18 percent per year. While the equity holder will earn less each year because of the interest that needs to be paid to the mezzanine lender, their initial investment can be halved, which allows for less risk.

If you want to make a mezzanine investment, you need to find a project or property where the equity holder is searching for a mezzanine lender. Since you are charging an interest rate for your loan, the returns that you obtain can be paid in any way you see fit. The rate of returns will be set in the initial contract with the borrower. You can mandate that the interest payments be made monthly, quarterly, or annually.

What is the Difference Between Senior and Mezzanine Debt?

open house property

The main difference between mezzanine debt and senior debt is that the latter doesn’t include any amount of equity. Senior debt investments usually come with lower returns but also lower risk. While mezzanine debt is lower on the capital stack than preferred equity and common equity, there’s still a considerable amount of risk attached to this form of investment. The main risk difference is in what these loans are backed by. Unlike preferred equity or common equity, there is a kind of collateral available with mezzanine debt and senior debt. However, this type of collateral is very different.

When you make an investment with senior debt, your investment is backed by the actual property you’re investing in, which means that a default on the property would allow you to acquire the property completely as a means of selling it or foreclosing on it. With mezzanine debt, your initial loan is backed solely by the cash flow of the property. Because of the higher risk of this loan type, you will charge the borrower a higher interest rate. With senior debt, the interest rate is close to eight percent. It’s possible for mezzanine debt holders to obtain interest rates of 12-18 percent. The choice that you make depends entirely on what you’re looking for from an investment.

Characteristics of Senior Debt

The main characteristics of senior debt include:

  • Prioritized for repayment in the event of bankruptcy
  • Lower returns
  • Secured by property
  • Lowest risk in capital stack
  • Regular interest payments

Characteristics of Mezzanine Debt

The main characteristics of mezzanine debt include:

  • Potential for high returns
  • Backed by property cash flow
  • Relatively low volatility
  • High-interest rates
  • Regular interest payments
  • Small amount of downside protection
  • Warrants that allow you to purchase equity in the property

How Do I Invest in Mezzanine Debt

dollar bills

When you want to invest in mezzanine debt, there are two primary methods for doing so. You can either negotiate mezzanine debt transaction with a company or invest in a private fund structure that pools investments together for the sole purpose of investing in mezzanine debt. If you’re an individual investor, you should consider the second option. By joining a private-fund structure with many other investors, your risk may be significantly reduced. You may also be able to join the private fund without needing to make a large initial investment.

Mezzanine debt investments that are made directly with the company or company owners typically require that the investors provide a large amount of capital. These direct investments are commonly made via private equity firms, investment banks, or family owners. If you’re a smaller investor, you will likely need to have a relationship with the borrower if you want to be able to invest in mezzanine debt. Otherwise, this type of direct investment is usually reserved for large institutions.

When you want to engage in this type of investment, keep in mind that the negotiation and closing process can take anywhere from a few weeks to a few months. The easiest way to enter the mezzanine debt market is via a private limited partnership, which is usually organized by an asset management firm. They will gather the funds and handle negotiations for obtaining high returns with comparatively lower risk.

Why Your Company Might Choose Mezzanine Financing

blocks of gold

If you or your company is considering investing in mezzanine financing, there are numerous reasons why you might want to do so when compared to the other types of financing in a capital stack. The potential returns are high and may provide you with fantastic dividends. Because of the contractual interest return that you will have made with the borrower, the volatility of this type of investment is typically lower. In most cases, the interest rate that’s negotiated when making a mezzanine debt investment is around 15 percent. You should receive interest payments in cash around once per quarter. If you are looking to take on some risk with your investment portfolio but want some amount of protection with your investment, choosing mezzanine financing as your primary form of investment is a good option for your portfolio.

When you want to get started with a mezzanine debt investment, you should first determine how much capital you’re willing to invest. If you’re investing hundreds of thousands of dollars, you could consider directly negotiating with the owners of the property. In the event that your investment is closer to $5,000-$20,000, it may be better to join a private investment management firm that focuses on mezzanine debt. With this approach, your investment will be pooled with other investments and will be managed directly by the private firm.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

When you’re searching for ways to invest in real estate, likely one of the most important terms related to the investment is the capital stack, which refers to the various types of capital that are invested into a real estate investment project. When looking specifically at a commercial real estate project, the types of investments that make up a capital stack include senior debt, mezzanine debt, preferred equity, and common equity.

While some real estate investors will focus solely on one type of investment, it’s also possible to spread your investment across different sections of the capital stack, which will help you diversify your portfolio. While the common equity and preferred equity layers of a capital stack come with more risk, they can also provide you with higher returns. Despite the lower returns of mezzanine debt and senior debt, making investments in one of these layers allows you to acquire much less risk. If you want to maximize your returns while making sure that the risk doesn’t spiral, having a well-structured capital stack can affect how well your portfolio is diversified, various tax considerations, and the amount of risk that you take on.

stacked books

For an investment that you make on a real estate project to be worthwhile, it’s important that the return you obtain is higher than the amount you invested. If you’re the main equity holder of a property and are in charge of its development, having an optimal capital stack can be highly important if you want to minimize your losses. If all of your investments go into the riskier common equity layer of a capital stack, your portfolio won’t be very diversified. You also risk losing much more than you make if the project doesn’t pan out. An optimal capital stack is one that has the right mix of debt and equity to it. The following will provide you with seven considerations to consider for an optimal capital stack.

1. Your Business Risk

chess game risk

One of the top considerations that you should take into account is the business risk that’s associated with your investments. If the type of property that you’re investing in comes with lower risk and steady cash flows, you’ll likely want the capital stack structure to have a higher amount of debt in it. If your investments mainly include mezzanine debt and senior debt, your returns should be consistent. If the property happens to fail and payments aren’t met, any senior debt holder will have the ability to foreclose and take ownership of the property in question, which helps to minimize risk. Apartment buildings and commercial properties that are credit-tenant leased are considered to be examples of low-risk properties with steady cash flows.

If the property that you’re investing in is an office building that’s located in a highly competitive market, you should expect that the building will have an extensive amount of turnover. With this type of property, it’s highly recommended that the capital stack structure of the building is focused more on equity than debt, the latter of which is borrowed money that must be paid back to the lender.

Businesses with a high amount of equity will have ownership rights for the property itself, which means that the equity portion of the investment won’t need to be paid back. For properties that have a higher chance of failing and not bringing in the right amount of returns, more equity can be preferable compared to a higher amount of debt.

If you analyze the risk of your investment, you’ll be able to more accurately determine what your optimal capital stack should be. When you’re thinking about funding a new project, understanding the capital stack structure of the property in question will allow you to keep your risk profile at the appropriate levels.

2. Interest Rates

calculator calculations money

It’s also important that you take the interest rates into account for the different levels of a capital stack structure. Debt is going to be less expensive than equity. If the owner of the property doesn’t provide you with consistent payments, you will be able to sell the property in order to recover some of your investment. When you hold equity on a property, you will have a claim on any remaining assets of the property. However, all other obligations to debt holders will need to be satisfied beforehand.

This is where the interest rates of a capital stack come into play. The interest rate or return rate for a senior lender will be around 4-8 percent per year, which is a relatively low rate. While the interest rate that you receive is low, you also have less risk and more security with your investment. As for a mezzanine lender, interest rates are typically around 9-13 percent, which allows for a much higher return. Interest rates for preferred equity investments can be upwards of 18-20 percent, which allows for a significant return on investment.

When considering the common equity layer of a capital stack, you can expect returns to be as high as 25 percent. Even though preferred equity and common equity investments can provide you with high returns, the business risk is also much higher. In the event that the real estate project fails, every other type of investor will be paid back before you. The interest rate and return rate that’s best for you all depends on the level of risk that you want to take on. You could also invest in several layers of the capital stack to ensure that you receive consistent returns with senior debt and potentially high interest rates with common equity.

3. Understanding the Credibility of the Assets

cash coins currency

In order to be certain that you’ve made the right investment with a real estate property, it’s essential that you understand the credibility of all of the assets that are placed in the property. While it’s easier to determine the credibility of assets for the capital structure of a business because of the extensive balance sheet they have, you should be able to identify the credibility of real estate assets without too much difficulty. Whether you’re investing in commercial real estate or infrastructure, the credibility of the assets depends on the credibility of the property. If your investment is going into a biofuels energy project, you can be fairly certain that the asset is a riskier one when compared to a standard real estate investment.

No matter your position in the capital stack structure, determining the credibility of the asset is key to understanding if you’re making a wise investment choice. If the quality of the property or asset that you’ve invested in becomes impaired, it’s possible to lose your entire investment, which is true whether you’re a senior debt holder or an equity holder. To determine the credibility of an asset, it’s recommended that you perform regular valuations.

4. Bankruptcy

petition to file for bankruptcy paperwork

It’s possible for you to declare bankruptcy if you are unable to repay creditors. When this occurs, the debt could be discharged or restructured. As an investor in real estate, it’s important that you understand what happens in the event of a bankruptcy. There are two main types of bankruptcy that you should be aware of, which include Chapter 7 and Chapter 11 bankruptcy. With Chapter 7 bankruptcy, the property that you’ve invested in will be liquidated, which means that any mortgage holders or senior lenders will be paid back before any remaining money is provided to equity holders. With this type of bankruptcy, there is typically very little capital left over for holders of common equity.

If you currently own the building because of the amount of equity that you’ve invested into the property, filing a bankruptcy can cause you to lose the property and the money that you’ve invested into it. Chapter 11 bankruptcy focuses on the restructuring of debts, which allows lenders to be paid back over a lengthy period of time. The best way to minimize the possibility of bankruptcy and potentially prevent it from occurring is by heavily cutting your expenses, using debt management services, and attempting to negotiate with your creditors.

5. Trade-Off

balance rocks

The trade-off consideration is one that determines how much debt and equity are placed into a building by the benefits and costs that come with both. When debt increases in a building, the benefits become lower while the costs increase. Even though equity starts out as being more expensive because of a lack of tax savings, higher amounts of equity will lessen in risk over time compared to high amounts of debt.

6. Financial Flexibility

stacks of money

If you own a property that has a mortgage on it, you need to consider the financial flexibility of the capital stack structure. Loan payments will need to be made every month. If you can’t make these payments or pay off the loan in full once it reaches maturity, you will risk the need to file bankruptcy or even lose the asset altogether. If the economic signs in the area for the property that you’ve invested in are currently mixed or even negative, you should consider a lower debt-to-equity ratio. Lower debt means that you’ll have more flexibility during tough moments in the economy.

7. Lender Appetite

business people

Lenders don’t always have a strong and aggressive appetite for making loans with a real estate property. If the surrounding market is currently going through difficult times, lenders will usually be less interested in providing loans for a property. The key to discerning how much debt you’ll use for your real estate investment is to first identify how willing lenders are to provide you with a loan.

When lenders and investors are highly aggressive, you may be able to obtain the money that’s needed for a riskier project. However, this can be a problem at times. When lenders are aggressive and agree to provide you with a loan for the property, they might require much higher returns and even control of the project, which you should consider when investing. It’s recommended that you maintain a healthy balance of equity and debt.

Building an Optimal Capital Stack Structure

You want to focus on building an optimal capital stack structure with your real estate investments if you want to have the right combination of risk and steady returns. While each individual investor has a different capital stack structure that’s right for them, it’s recommended that you avoid becoming too focused on just one layer of the capital stack. If all of your investments are common or preferred equity investments, the risk of losing everything that you’ve invested is greater. If the majority of your investments go into senior debt, your returns will most likely be lower. A healthy mixture of the two gives you a chance to obtain high returns while also lessening the amount of risk that you take on.

You should take all of the previous considerations into account because of the general risks that come with making any kind of investment. Real estate investing is never easy. However, you can mitigate the risks by better understanding what goes into a capital stack structure. For instance, if the asset that you invest in turns out to be worthless, it won’t matter that you’ve made a low-risk senior debt investment. You’ll still lose most or all of the money that you’ve invested. Making smart investments in real estate means understanding everything that goes into the capital stack structure of a property.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

If you’re looking to invest and set yourself up for long term financial success, one type of investment that you may want to consider is investing in real estate. There are many ways to invest in real estate including by owning rental properties, buying properties to rehab or develop for resale, investing with other persons who buy or develop property, investing in a real estate investment fund or real estate investment trust which aims to diversify risk by pooling your investment with others to make numerous real estate investments and generate a stable return, or investing in individual trust deeds where you essentially act as the lender to a third party real estate developer, to name a few.

Before one selects the proper real estate investment for his/her particular needs, it is essential that he/she identifies the risk associated with the investment in question. One important term you will often here which relates to the risk assessment is the “capital stack.” When it comes to real estate investments, the capital stack refers to the various layers of funding that are required to finance a real estate investment.   

Where your investment falls within the capital stack and the priority it has in relation to other positions in the capital stack directly bears on the risk of the investment in question. If everything goes according to plan, all positions in the capital stack will be paid the targeted return. Unfortunately, however, things don’t always go as planned, and you want to make sure you understand your position in the capital stack so that you can make an informed decision before you decide to invest. By identifying where your investment is situated within the capital stack, you will be able to understand more about when you get paid and the amount of underlying risk associated with the investment.

The Capital Stack

Though the capital stack will likely be structured differently based on the particular investment, the most common four layers of the capital stack in real estate investments are common equity, preferred equity, mezzanine debt, and senior debt.  Some capital stack structures have fewer layers, such as, just debt and equity, and others have more.

The capital stack generally tells you the order of priority of payout with respect to other positions within the capital stack. Starting at the bottom of the capital stack, the senior debt will be paid out first, then the mezzanine debt, then the preferred equity and finally the common equity.  If the real estate investment doesn’t perform as projected, there may not be enough money to repay all money invested along with returns. The bottom layers will be repaid first, and the top layers will incur losses before anyone else.  

Thus, your position in the capital stack directly relates to your risk. If you happen to be towards the top of a capital stack, you will inherently have more risk than the lower layers. If you are in the bottom of the capital stack, your investment will be safer relative to the other positions in the capital stack.  

The projected return, however, is generally structured to correspond to the amount of risk. While investing in the bottom of the capital stack is typically more secure, it also typically generates lower returns. While investing in the top of the capital stack is less secure, there tends to be more upside potential. Keep in mind you can also vary your risk and returns by investing in multiple layers of the capital stack at the same time depending on your investment goals.

The specific terms and structure of any particular investment will certainly involve many more complexities, but having a basic understanding of the capital stack can provide a solid foundation to build from. This article endeavors to provide you that foundation.  

Common Components of the Capital Stack

As touched on above, the four most common components of a real estate capital stack include common equity, preferred equity, mezzanine debt, and senior debt. We’ll start our discussion from the top and work our way down.  

Common equity

Common Equity

The common equity of an investment is considered to be the top layer of a capital stack. This portion of a real estate stack is considered to be the riskiest, yet potentially most rewarding, layer.

It is risky for numerous reasons. First, when you’re involved in this layer of the investment, every other layer of capital that was invested into the project will receive repayment before you do. In other words, you’ll get paid last. Second, the common equity layer typically does not have a recorded secured interest in the property, nor is it typically entitled to reoccurring payments. Rather, the return of the entire investment, principal and potential returns, typically will not be realized until the property is sold or there is another liquidity event. If the investment does not perform as projected, you are potentially at risk of losing some or all of your initial investment.   

On the other hand, investing in the common equity layer of the capital stack can be the most lucrative. Potential returns typically aren’t capped for common equity investors. Thus, in the event that the investment is largely successful, common equity investors could realize very sizable returns.  

If you are investing in the common equity layer, you will typically be standing side by side with the sponsors of the real estate investment. The sponsors are often relegated to the highest position in the capital stack. This incentivizes the sponsor to maximize the returns for every position in the capital stack, because the sponsor will only realize its returns if every position below is first paid. Once everyone below is paid, the sponsor, along with other investors in the common equity layer, also capture any remaining upside.    

A stack of coins

Preferred Equity

The preferred equity for a real estate investment is the layer of a capital stack that falls just below the common equity layer. It is a malleable layer that comes with a significant amount of flexibility in regards to how it is structured, but typically entails a preferred rate of return that must be paid, and therefore provides more certainty than the common equity layer. The preferred equity layer will also have the right to repayment before the common equity investors, which lowers the amount of associated risk.  

The preferred equity layer is commonly structured as a hybrid to share characteristics of the common equity and mezzanine debt layers. Like the common equity layer, the preferred equity layer will typically share in some (though less) of the upside of the investment. Like the mezzanine debt layer, the common equity layer may also have a right to regular recurring payments.  

While there are many potential ways to structure the preferred equity layer, investments in this layer are often differentiated as either “hard” or “soft.” A “hard” preferred equity investment tends to be less risky. It typically requires that the preferred return must be paid regardless of cashflow or the performance of the investment, and involves varying remedies if payments are not made, including the right to take control of the investment or force its sale.  In this way, it operates much like the mezzanine debt layer described next.    

In contrast, a “soft” preferred equity investment typically only requires payments if there is sufficient cash-flow, and may or may not entail remedies if those payments are not made.  In this way, a “soft” preferred equity investment is more similar to the common equity layer.

Man explaining Mezzanine Debt

Mezzanine Debt

The mezzanine debt layer sits just above senior debt in the capital stack, which means that payment priority will come immediately after any senior debt investors, and before the equity layers. Mezzanine debt typically involves characteristics of senior debt and equity. Like senior debt, mezzanine debt investors will typically have a right to receive regular payments at a stated rate not tied to the performance of the investment, and that rate will typically be higher than the senior debt rate because of the increased risk. Like equity, mezzanine debt investors will typically have a right to share in a portion of the potential profits, but a much lower portion than the equity layers. 

Unlike senior debt, however, mezzanine debt is not typically secured by a recorded interest in the property itself. While mezzanine debt investors may have limited foreclosure rights, those are typically governed by the terms of agreements among the parties. Unlike equity, mezzanine debt is debt. The right to repayment attaches regardless of the performance of the investment.    

The mezzanine debt layer can be attractive if you want to share in some of the potential upside, while also securing a guaranteed right to payment at a lower position in the capital stack.    

Senior Debt

Senior debt for real estate investment is the very foundation of the capital stack. It is typically the largest, least risky, and least expensive portion of the capital stack. As an investor, if you want your investment to come with the least amount of risk attached to it, you should consider a senior debt investment. 

Senior debt is secured by a deed of trust or a mortgage recorded against the property, which means that you will be able to claim the title of the property in the event that the borrower defaults on making its regular payments through the foreclosure process. It is also structured to require regular monthly interest payments at a stated rate, that is not tied to the ultimate performance or success of the investment.   

Because of its lower relative risk, returns for senior debt investments are also lower. As a senior debt investor, you will not have the right to share in any of the potential upside or profits of the venture.  Whatever rate is negotiated and stated in the loan documents, is the return that you can expect to receive.   

Professional investor in suit

What Your Position in the Capital Stack Means for You

It’s important to understand that different positions in the capital stack will affect the investment in different ways. The position that one should take in a real estate investment all depends on one’s broader portfolio strategy and risk appetite. If the intent is to make risky investments that could provide the highest ROI, the focus is usually on the common equity and preferred equity layers of the capital stack.  If, on the other hand, one wants a risk-averse investment with a lower rate of return, it’s much better to be positioned at the senior debt or mezzanine debt layers of the capital stack. One can also consider being in different positions of the capital stack at the same time, which helps to spread out risk and obtain higher blended returns. 

Understanding the capital stack is, however, only one small, albeit important, piece of information necessary to assess the risk and evaluate if a real estate investment is right for you. For example, you can invest in the senior debt portion of the capital stack, but if the underlying investment is not otherwise sound, it still could be a bad investment. Conversely, a common equity investment could be well worth the associated risk if other factors exist to mitigate the risk and provide the opportunity for significant upside.    

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.