capital stack apartment syndication is the focus of this guide for passive real estate investors. First, it highlights the main idea behind the topic. It also outlines the risks and questions worth reviewing. As a result, you can approach the discussion with a clearer framework.
What to know about capital stack apartment syndication
Core ideas for capital stack apartment syndication
What is a Capital Stack?
A capital stack consists of the total capital invested in the project. For multifamily real estate, the capital stacks will be comprised of a combination of senior debt. Mezzanine debt (optional), common equity, and preferred equity (optional). Having a clear understanding of the capital stack in each investment offering is important for developing your diversified portfolio.
Risks and tradeoffs
Which Components Have Seniority
In figure 1 you can see how each of the various components of a capital stack are positioned. As you can see the capital stack is built from the bottom up. Each component has seniority over all other components positioned above it in the capital stack. Conversely, each component is subordinate to the other components positioned below it in the capital stack.
Questions to ask
Moreover, when asset is either refinanced or sold the proceeds are dispersed from the bottom of the capital stack and up. After each position is fully repaid, then is will go to the next. Continue until all positions have been fully repaid.
If there are not enough funds to fully repay all the capital. Then the losses are distributed from the top of the capital stack first. In addition, the higher positions in the capital stack are higher risk. The lower positions in the capital stack are lower risk positions. The returns will be higher in the higher positions in the capital stack.
Practical next steps
In addition, the returns will be lower in the lower positions in the capital stack.
Capital Stacks for Our Projects
Core ideas for capital stack apartment syndication
Our group typically has two different types of capital stacks when we are acquiring an asset.
Three Components for Single-Tier Equity Structure
Risks and tradeoffs
Moreover, in figure 2 you can see that there are three different components to this capital stack structure. From the bottom up, there will be senior debt, Class A shares, and then Class B shares.
The senior debt is obviously for the primary loan to acquire the asset. The Class A shares will consist of the limited partners and will bring 100% of the equity required to close. In addition, our group will typically invest about 10% of the initial equity in Class A shares alongside our passive investors to be sure our interests are aligned.
Questions to ask
The Class B shares in this capital stack are reserved for our group for getting the deal together.
When the asset is sold in this capital stack structure, the senior debt is paid back first, then the Class A shareholders will receive their entire initial capital back. Then the equity split of profits will come into play which is typically 70% to Class A shareholders and 30% to Class B shareholders.
Practical next steps
Four Components for Dual-Tier Equity Structure
Moreover, in figure 3, you can see that there are four different components to this capital stack structure. From the bottom up, there will be senior debt, Class A shares, Class B shares, and Class C shares.
Core ideas for capital stack apartment syndication
The senior debt, as with the previous example, is for the primary loan to acquire the asset. The Class A shares will consist of limited partners in what is considered a preferred equity position. In addition, will typically bring 25-35% of the equity required to close. The Class B shares will consist of the limited partners as well.
Will bring the remaining 65-75% of the equity required to close. In addition, again, our group will typically invest about 10% of the initial equity required to close in a combination of both Class A shares or Class B shares depending on what is available as we get closer to closing.
Risks and tradeoffs
The Class C shares in this capital stack are reserved for our group for putting the deal together.
When the asset is sold in this capital stack structure, the senior debt is paid back first, then the Class A shareholders will receive their initial capital back, then the Class B shareholders will receive their initial capital back.
Questions to ask
Then the equity splits of profits will come into play which is typically only available for Class B and C shareholders since the Class A shareholders in the preferred equity position are paid their higher preferred return in exchange for potential upside on the deal. In addition, the Class B shareholders will typically receive 70% of the profits.
Class C shareholders will receive 30% of the profits.
Practical next steps
Hedging Your Risks with Preferred Equity Positions
Moreover, the preferred equity position carries lower risk compared to common equity, positioned just below senior debt in the capital stack. For preferred equity investors to experience a loss, the deal would have to underperform significantly. In addition, if preferred equity is not paid, it indicates that common equity investors would also not receive returns. Many of the more sophisticated investors, including institutional investors.
Core ideas for capital stack apartment syndication
Prefer to be in a preferred equity position to lower their risks within the investment.
If you want to have a fully diversified portfolio it is a good idea to invest in a combination of both preferred equity and common equity positions.
Risks and tradeoffs
Understanding your position in a capital stack is certainly one of the important items you should be reviewing prior to investing but there are additional considerations at play including how preferred returns are structured. Equity waterfalls, distribution hurdles, etc.
Key takeaways for capital stack apartment syndication
- Start with the goal and timeline that fit your wider financial plan.
- Next, review the assumptions, risks, fees, and possible outcomes.
- Finally, compare the opportunity with other ways to use your capital.
Put capital stack apartment syndication in context
Every investment decision depends on the investor, the deal, and the market. Therefore, use the ideas above as a starting point for deeper due diligence. Review source documents, ask direct questions, and seek qualified advice when needed. For more guidance, explore our passive real estate investing education.
A clear review of capital stack apartment syndication
capital stack apartment syndication deserves a clear and practical review. These short checks can support a more informed decision.
- Start with a clear goal.
- Next, define the time horizon.
- Review each key assumption.
- Compare the likely outcomes.
- Test a less favorable case.
- Ask who controls each decision.
- Confirm the fees and incentives.
- Study the market and the deal.
- Check the supporting documents.
- Look for clear communication.
- Compare other choices.
- Keep the full plan in view.
- Write down the main risks.
- Review the source of returns.
- Check the exit assumptions.
- Understand the tax questions.
- Consider the need for liquidity.
- Match the choice to your goals.
- Ask direct follow-up questions.
- Confirm the reporting process.
- Review the operating plan.
- Check the team’s experience.
- Compare the best and worst cases.
- Keep expectations realistic.
- Use qualified advice when needed.
- Document the final decision.
- Review the decision over time.
- Watch for changing conditions.
- Stay focused on the long term.
- Finally, act with a clear reason.