394. The Deal Doesn't Make You Money. The Financing Does.

Key TakeawaysCapital stack basics: Every deal is financed through a mix of debt and equity layered by priority — the more secure/senior a position, the cheaper it is, and lower layers get paid back first. Stacks range from simple (all-cash) to highly complex (10+ sources, as in affordable housing deals).Senior debt (cheapest, first position): Currently running ~6.5–7.5% interest, typically capped at 60–75% loan-to-cost. Lenders often quote a higher headline LTV/LTC, but DSCR requirements — not the stated LTV — are what actually limit how much debt a deal can support today.Mezzanine/junior debt (second position): Usually a private lender rather than a bank, and must be approved by the senior lender — stacking unapproved debt on top violates loan covenants and risks the senior lender foreclosing. Mezz just wants its principal plus interest back; it doesn't share in upside.Preferred equity: Sits above mezz debt but below common equity — technically equity (counts toward the down payment) but structured with debt-like protections and payment priority. Highly flexible, often using accrual-based returns (no cash payment required until the deal generates enough cash flow), letting pref investors accept a smaller stake for the same capital in exchange for that added security.Common equity (most expensive, last in priority): The actual cash down payment/investor capital, commanding the highest returns (often ~20% annualized cash-on-cash) because it's the most "patient" and highest-risk capital. This is where waterfall economics apply — e.g., an 8% preferred return paid first, with remaining profit split pari passu — and where profit splits scale by deal size, from negotiated splits on smaller deals to "2 and 20" institutional structures on $10M+ deals.