---
id: "concept-capital-stack"
type: "concept"
source_timestamps: ["00:20:00", "00:22:00"]
tags: ["finance", "risk-management", "capital-markets"]
related: ["concept-syndicator-wipeout", "claim-lps-take-first-loss", "framework-distressed-acquisition", "prereq-syndication-structure"]
definition: "The structure of financing in a real estate deal, dictating the order of risk and repayment, where equity takes the first loss before debt."
sources: ["mcelroy"]
sourceVaultSlug: "mcelroy-multifamily-distress-playbook-2026Jun25"
originDay: 9
---
# The Capital Stack and Loss Hierarchy

## Definition

The **capital stack** represents the hierarchy of financing and risk in a real estate transaction. [[entity-ken-mcelroy]] explains this through the lens of a distressed deal he bought in San Antonio (the same case study driving [[framework-distressed-acquisition]]).

## The Loss Waterfall

When a property's value drops significantly, losses are absorbed **from the bottom of the capital stack up**:

1. **Common equity (LPs and GPs)** — wiped out first. This is why [[claim-lps-take-first-loss]] holds mechanically.
2. **Preferred equity / mezzanine** — absorbed next.
3. **Senior debt (the bank or debt fund)** — takes a *haircut* or write-down only after all equity is gone.

## The San Antonio Example

McElroy's case study: a property with a **$25 million senior loan** was revalued in the *low $20 millions*. The sequence:

- All LP and GP equity → zero.
- [[entity-bank-of-america-d9]] (the lender) was forced to take roughly a **$4 million write-down** on the debt.
- The bank then sold the asset to McElroy at the new, lower basis — the entry point that anchors [[framework-distressed-acquisition]].

Understanding this stack is crucial for realizing why LPs are currently the most vulnerable layer in the [[concept-syndicator-wipeout]].

## Nuance

The enrichment notes that while LPs do take the first loss in syndicated deals, the broader correction will also impose meaningful losses on **banks, CMBS bondholders, mezzanine lenders, and sometimes GPs** — so framing LPs as the *sole* victims oversimplifies the systemic picture.


## Related across days
- [[concept-syndicator-wipeout]]
- [[claim-lps-take-first-loss]]
- [[prereq-syndication-structure]]