What does "capital stack" refer to in real estate financing?

The term "capital stack" refers to the combination of debt and equity financing used to fund a real estate project. In real estate financing, it outlines the hierarchy and structure of the funds that are utilized to finance a property or development. This stack typically includes various layers of capital, which can range from senior debt at the top, followed by mezzanine debt, and finally equity at the bottom.

Understanding the capital stack is crucial for evaluating the risk and return profiles associated with a real estate investment. Each layer in the stack carries different risk levels, with senior debt being less risky because it has first claim on the assets in case of liquidation. Equity, on the other hand, has the highest risk but offers the potential for higher returns.

The other options, while related to real estate, do not accurately define the capital stack. Valuation of a property relates to its market worth and does not reflect the financing structure. The ranking of property locations is about assessing geographical desirability rather than financial structure. Similarly, distinguishing between public and private funding sources relates to the type of capital but not to the way that capital is structured and prioritized in financing a project.