In a real estate deal, the debt component is arguably the most important of all. In reality it takes a number of services and resources to structure, close and run the SPE, but choosing the right debt instrument can make or break a deal. Why is debt so important? Which debt is best?

The way a deal is structured will dictate everything from the transaction payment terms to how the post-close entity or operation is funded, organized and run. Different stakeholders will focus on certain terms of the deal structure more than others, because it’s that certain aspect of the deal where they realize their return. In all deals, structuring should be such that maximum value is realized for each stakeholder, including the seller, the buyer and it’s shareholders, the lender(s), etc.

The capital stack is a conceptual organization of real capital that is contributed to a transaction. The legal documents that represent these concepts also define variables such as ownership rights, the order in which these rights are exercised for distribution of cash flows, and the transfer of ownership in the event of a loan default. You won’t see a graphic like this in a common legal document, but it’s easier to depict relationships visually this way (the stack).

Another question is why does it matter? Well, the good thing is that it’s really not all that complicated. You just need to know some of the basics, and you’ll be able to invest with confidence knowing that you and your investment sponsor are in compliance.