Every real estate deal is funded by layers of capital. Those layers determine who gets paid first, who gets paid last, and who gets hurt most if something goes wrong.
Here is how the stack works, from safest to riskiest:
Senior debt — the bank loan. Paid first. If the deal fails, the lender forecloses before anyone else sees a dollar. Lowest return, lowest risk.
Mezzanine debt — subordinate to the bank, paid before equity. Mezz lenders charge higher rates to compensate for the additional risk and their loan documents often include aggressive default provisions that can strip equity holders of ownership if performance targets are missed.
Preferred equity — structured like debt (fixed return, paid before common equity) but technically an equity position. Expensive, and every dollar going to a preferred equity partner is a dollar not going to your investors.
Common equity — last to be paid, most risk, most upside. This is where LPs and the sponsor sit.
At Westlake, we keep the stack simple. Conventional senior debt at 50–65% loan-to-value. That is it.
We do not use mezzanine debt or preferred equity. Here is why.
Mezzanine debt is expensive and punishing. Default provisions can transfer control away from equity fast. The cost eats into investor returns. The structure creates misaligned incentives between capital layers.
Preferred equity adds cost and complexity without adding value to our LPs.
Conservative leverage is not just a preference. It is a protection mechanism. At 50–65% LTV, our deals can absorb value declines, extended vacancies, or rising rates without putting investor capital at risk.
The deals that blow up in a downturn almost always have one thing in common: too much leverage, too much complexity in the capital stack, or both.
We have never had a capital call. We intend to keep it that way.
What does your ideal capital structure look like in a real estate deal?
Wednesday Real Estate 101: The capital stack
