Deep Dive Into the Capital Stack/Structure
The capital stack, also known as the capital structure, refers to the various sources of funding that a company or real estate project uses to finance its operations and assets. The capital stack is typically made up of a combination of equity and debt.
Equity refers to ownership interests in a company or project, and can come from a variety of sources, such as the owner's personal capital, venture capital firms, and private equity firms. Equity investors typically receive a share of the profits or appreciation of the company or project, but do not receive fixed payments like debt investors do.
Debt refers to loans or other forms of borrowing that a company or project uses to finance its operations. Debt can come from a variety of sources, such as banks, credit unions, and other financial institutions. Debt investors, also known as creditors, receive fixed payments, called interest, on the amount they have lent.
The capital stack can be arranged in a variety of ways, depending on the specific needs and goals of the company or project. For example, a company or project with a high level of risk may have a higher proportion of equity in its capital stack, while one with a lower level of risk may have a higher proportion of debt.
It's important to carefully consider the capital stack when evaluating real estate investments, as it can have a significant impact on the risk and return of the investment. A well-structured capital stack can help to optimize the balance between risk and return and ensure the long-term sustainability of the investment.