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What is up, my pro design builder family? This is Sam, also known as the Pro Design Builder, bringing you another training video. I'm the best in the business, and it's not even close. And today we're gonna be talking about an interesting topic, but I'm gonna treat it as more of an introduction. And reason being is uh it's a lot to take in. We're gonna be talking about what is a capital stack. Alright, so uh if I had to rank this particular training, I would say I would rank it around an eight or a nine. No, actually, what am I talking about? A nine or a ten, right? Reason being is when you are are speaking the language of capital, right? That means you have significant experience, that means you're talking to funds, that means you're talking to different uh financial institutions in the way that they receive the information that you're talking about, right? So today, when we're breaking down what a capital stack is, I'm going to really be teaching it as an introduction to um uh capital and and the and the the terminology and how uh capital receives information and how deals are structured, right? Typically, when you're talking about a capital stack, you're talking about a significant investment that's being made for a development project. We're not talking about hundreds of thousands here, we're typically talking the it in the way of millions of dollars that you are uh managing or structuring together to put a new development project together, right? So uh my name is Sam, also known as the Pro Design Builder. This group is specifically for real estate investors that are looking to make the leap into new development. You may not know where to start, it's a lot of information, it's a lot of hoops to jump through if you really want to make a six-figure return uh on any new development project. But that's what this group is for, right? I'm here to be your guide when you are ready to make that leap into new development and streamline the information and the process and the steps to understanding exactly what you need to do, and this is what this particular training is about, right? So I will say to you, don't uh eat the whole apple at in one bite, right? How do you eat an elephant? Right? You eat an elephant one bite at a time, and then once you've made once we've made this introduction to you and you hear it again, and you are around people that are speaking the language of capital, it'll make perfect sense to you. But as a first-time introduction into what a capital stack is, it may be over your head, like I said, this is a nine or a ten type of training, but I wanted to make this introduction to you because I feel like everybody has the ability to grow into this level of developer, right? Where we're speaking about capital in this way to structure deals that are bigger whenever you get there, right? But I wanted to give you that introduction now. So, uh, first off, um, if you don't know my story, uh I was a house slipper for about five years, right? But before that, my wife came to me and she had gotten into med school and she wrote me a letter and said she didn't want to go. And then from there, what happened was she handed me a book, which is Rich Dad, Poor Dad. Uh, I read it, it spoke to me. We went to a seminar, uh, that was very good, but I needed one more seminar to uh grasp the concept, and then from there I started just putting uh what we call uh messy action into play. I was very green as as an investor, but I'm very ambitious, um, open to learning, and I just started just doing everything that that I had learned instead of freezing and waiting until I know everything, I started making steps, right? Taking steps right away. But I had a friend of the title company that would help me, uh, and I'd be able to call him and he'd he'd tell me, Hey Sam, this is what an escrow is, don't put it on this line. He was gonna handle all the title work, so I was able to get through my first few deals. And what happened was once I actually started flipping property, then uh on my first flip property, you know, I hired a contractor, I fired a contractor. I hired a second contractor, I fired a second contractor. I hired a third contractor, thank God the numbers were good, and we finally got through the project and I we we made money. But I saw some flaws in how contractors operated, how they planned, how they um pursued their jobs, and and I made a decision that I was probably never gonna be happy with the level of contractors, the way that I saw them operating, and from there I started managing my own projects. All right, I got really good at getting in and out of projects and managing them on my own, learning on each project. I used YouTube to really figure some stuff out, and then from there, what happened was after five years of house flipping, I got so good at it, it just made sense to become a contractor, you know, because I had this thought when the economy was you know um good, I'd be a contractor. When economy is bad, I'd be uh more of a flipper. But what happened was after I became a contractor, I realized I didn't know anything, right? Because I had been copying what I saw these other contractors doing, and I didn't I didn't know my head from my you know from my tail. So I found a mentor, and the mentor introduced me to design build, and what design build system is, is I take a client from concept to completion, from from sketching it on a paper where it don't exist to putting together plans to getting our architect involved, figuring out why they want to live the way they want to live, getting the designer uh involved, selecting all their finishes, doing all the permit work, doing all uh of the selections and ordering, and then taking the client through the actual construction process, very smooth process once it's done correctly. But it taught me a lot of things, right? So that's I use those skills to help people like you, real estate investors, go to the next level because I'm accustomed to taking concept to completion, right? So that's what I've been doing the last eight years, and now I'm focusing on helping investors make this transition that seems like a daunting task, which it is. There's a lot of involved in taking on a new development project, but once you do it once and then twice, then you know it becomes second nature, which is what it's like for me. So today I wanted to talk about what is a capital stack, right? And I wanted to first define what a capital stack is, all right. So a capital stack refers to the hierarchy and structure of financial um sources used to fund a real estate or business investment. It represents how the total capital for the project is organized, detailing the the order in which various investors or lenders uh are are compensated in case of a distribution or a liquidation, each component of the capital stack comes with it, comes with its own level of risk, return uh expectations, or um rights to cash flow. Right? So there's there's several different tiers when it comes to a capital stack, right? And the way that capital stacks are typically uh positioned, pretend it's a slice of pizza, right? And since we're talking about um construction and we're talking about uh new development, the best way to describe the bottom or the foundation of the capital stack is senior debt, right? Senior debt is typically whoever is the most invested into the project is typically the senior debt. Now, this could be a little bit different by what what I just said. Senior debt is typically a financial institution, and in new development, senior debt is typically uh a construction loan, right? They have the first uh right of refusal, they have the fur they are the first to get paid if something happens or the project goes south. So let's let's kind of break down what a senior um what senior debt is, right? It's low risk, lower returns, right? So secured by the property or asset, right? So they receive the deed of trust, just like a mortgage, right? The the mortgage would be your senior debt, right? And anybody else that's putting on or working on your property, those are gonna be uh secondary, you know, uh debts or or to to to the actual property. So let's break this down, right? Secured by the property or asset, first to be repaid in case of a default or a sell, and typically includes loans from from from banks or financial institutions, which is the most typical way you'll see a senior debt position, especially when we're talking about new development, new construction, right? Often has a lower cost of capital, but uh the strictest repayment uh terms, right? So let's say you uh acquire a construction loan and it's at let's say you know 10-12% uh on the construction loan. That's APR. So annually you'll pay that. So break that down by 12 months, and that would be your annual percentage, right? So they typically have a um I would say a deadline, uh but anywhere from uh 18 months to 24 months is typically the the time frame that they they they want to call this project due. They don't want this project being a run-on project. They typically like to lend to experienced investors, right? They could acquire bigger and bigger construction loans. So that's what that is, and then there's tiers in the senior debt position, which is very important because senior debt gets paid out first if there's some sort of calamity or liquidation that's needed. So the the first tier is going to be your financial institution. Your second tier is called a um your second lien, but senior debt, uh, not backed by the collateral, that's important for you to know, but they are positioned in a way that they get paid first after the the first lien holder, right? So they're the second lien holder in that particular uh project, right? So the next tier of the pizza, which I would say would probably be your um your actual shell of a building, right? The shell is all your exterior walls and roof sheeting, right? So that that would be your your shell. This is called mezzanine debt, or they call it uh sometimes they call it mes, uh mes funding, and to and I'm gonna break this down and then I'm gonna give you some examples of what mes mezzanine debt looks like. Alright, so a hybrid of debt and equity sitting between senior debt and equity in the property, often unsecured. This is very very important for you to understand, uh, often unsecured and subordinate to senior debt, right? So it's telling you exactly where it's positioned, it's position uh subordinate to the actual senior debt, right? So typically mes funding, because it involves risk, they they're positioning themselves where they get a sliver of of the deal, plus they get a higher interest rate or a higher percentage for the loan, right? And I'm gonna break down some examples. So uh returns are higher than senior debt, typically structured as as an interest payment and sometimes won warrants or uh uh equity kicker, right? So let me talk, let me tell you about what this looks like. So um what you might you might structure a deal, right? You have your uh analyst put together the financial package, the financial numbers, right? You know you could you could get a construction loan, but your MES funding will typically come from some sort of fund, right? And there's a couple of different types of funds, right? So you have institutional capital, which is uh I would say company funds that are like um insurance companies, um those are are the main ones that they are sitting on a top a lot of cash, right? And they typically like to get great returns on their investment, but they might have stipulations on there where it require you to come with seven percent of the cash on the deal, so you are invested in the deal, right? So I remember early on looking for um looking for capital, right? And I remember one of the questions that I got asked by a friend, he said, What is your risk in the deal, right? And and funders are uh want to see you invested in the deal somehow. So to position yourself, you know, correctly, you need to be invested in the deal uh somewhat. So uh that's gonna be important for you to know and understand what they're looking for. The the other mez mes that that uh that you could use as a vehicle is um uh self-funded uh uh IRAs, right? So if the IRA uh self-directed, my apology. Self-directed IRAs. So there might be a fund that controls a number of self-directed IRAs, and they're looking for opportunities for their clients to invest in certain projects. So if they get a cash on cash return, which you're looking to give them, and then they get to participate in the upside. Let's say they get to participate five percent in this particular deal on the on the profit side by lending you you know this you know large percentage of cash, right? They know and they understand that this comes with risk, right? So they are reviewing the numbers and making sure that they work, and also your experience level. This is why it comes with experience. Now you have several projects to show that say, hey, listen, this is what we do as developers. We're seasoned, we understand uh our our playground, we understand what we're looking to produce, and we've done this before, right? So this is why this is very high level when we're talking about uh funding a development project. So that's what mezzanine debt is moderate risk, moderate returns, but they get the equity kicker to participate in the project uh on the profit side, so this makes it more appealing to the capital so you could um receive that investment, right? So the the last two of the pizza, I would say um the preferred equity, right? I would say that's the guts of the home or the guts of the new development project. That's your framing, that's your um MEPs, that's your finishing, right? So that's all of that stuff uh on the interior to pretty or beautify um the project, right? So let me let's break down what that looks like. So preferred equity, higher risk, higher return, um, provides fixed provide fixed returns, preferred dividends before uh common equity uh compensation prior to cash flow distribution, but does not have the same uh collateral uh protection as debt, often used by investors seeking steady returns with some upside potential, right? So they know and they understand that this particular uh position in the pizza has very high risk, but if they're getting a better return than the um than the stock market, this is a appealing investment to them to uh participate in this type of project because the returns are going to be bigger. You could share part of the pie with this particular um um stakeholder, right? So uh so that's what that put uh potentially looks like, right? And then the last piece is at the very top. Now you have your your foundation, you have your shell, you have your guts, your interior, all your finishes, and stuff like that. Now the project is completed. So the position that you are in as the developer is common equity, and it has the highest level of risk, highest level of return, and this is kind of how it breaks down, right? So uh represent the ownership stake of the project. You're the last to get paid, but sometimes when you get paid, you get paid very well. So last to get paid after all other obligations are met, carries the highest risk because repayment is contingent on the success of the project, very important, right? But you want all of your investors to win, including yourself. So those people get addressed first. All right, offers the greatest potential for upside if the project performs well, right? So I'm gonna tell you about a project I was representing, so I was the broker uh of my um friend Josh on, right? And I'll tell you uh I I saw his performance, I'll tell you what this particular project looked like. These numbers were very big, right? And and it was all right, so here's how the deal broke down, right? So it was uh I forget how many total units uh involved, uh, but it was several hundred units. The construction loan was like 52 million, the Mes loan was like 20 something million, and they were going to need to participate that that 7%. I think they were looking at somewhere about 77 million all in to get this uh high-rise project off the ground, and the profit that they were projecting because they were merchant builders, all right. So, merchant builders what they do is they build the project, start to uh uh allocate and hire the people to fill the fill uh all of the uh rentals, and then from there they put it on the market as a cash-flowing asset for a fund that wants to hold and cash flow, right? So that's kind of what they do, and they want to sell as quick as possible. So that's what that deal looked like. So it was 77 million all in, and the sales price where it what they were looking at uh this is pre-COVID, uh, was looking at 110 million as an exit. So his profit once everybody was paid, and they took two to three years to get this project completed, was a little bit over 30 million dollars, right? So when I'm talking like that, obviously this is not um lightweight stuff. Um, when you're talking about high-rise uh building, um, you need significant capital, you need significant uh experience, and you need significant uh investment and relationships to be able to even be in the running of a project like this, right? So, you know, that's gonna be important for you to know in the future once you gain the level of experience that uh you need to put together projects like this. Um, and it's not for the faint of the heart, it comes with a lot of stress, it comes with a lot of also it comes with a lot of litigation, and I just gotta be very honest with you. But the windfall at the end of those three years, on average, it was about ten million dollars a year to put this all together, right? Staff of six people, seven people, one project, looking at a return of thirty million plus. Plus other projects that they have going on already. Doesn't sound bad, right? Your labor is not high. You have a team of professionals working for you to structure your deals and to also sometimes get boots on the ground to um, and then you always want to hire uh the top two or three construction companies um to perform that that sort of build for you, right? So I'm gonna break this down uh this capital stack uh with with real numbers so you you understand exactly what this looks like, right? So give me an example, and so let's let's look at a $10 million project and see how it's structured with the capital stack, right? So six million of it is senior debt from the bank, secured it's a secured loan to the property, right? Then two million dollars of mezzanine debt from a private lender, one million preferred equity uh from investors, and then one million common equity from um from from your from your sponsors and and partners. So that's kind of how that particular deal would be structured in a capital stack situation, right? So uh I didn't want to throw too much at you. Like I said, you bite a you eat an elephant one bite at a time, but I feel like it was important for you to uh begin to start processing things in a way that developers and high-level uh developers are processing capital and speaking about capital. Alright, so if you ever have any questions, feel free to leave comments uh in the comments below. Uh, I'm an open book, I want to help you win, I want to help you um get generational wealth, you know, for you and your family and for whatever your ambitions uh are in the future. Outside of that, pro design builder Sam, the best in the business, and it's not even close. Have a great day.