Development finance is structured as a capital stack: layers of funding that sit in a defined order of priority for repayment. Senior debt ranks first and is the cheapest. Mezzanine sits behind it and costs more. Equity ranks last and is the most expensive of all, because it is paid only after everyone else. The order of repayment is the reason for the pricing, and once that is clear the rest of development finance is arithmetic.
Senior debt
Senior debt is the first mortgage over the site. It funds the largest share of the project cost and is repaid first from sales or from a refinance on completion. Because it ranks ahead of everything else and is secured against the land and the works, it carries the lowest cost.
Senior lenders size their exposure against measures of the project rather than of the borrower: loan to cost, which is the advance as a share of total project cost including land and construction, and loan to gross realisation, which is the advance as a share of expected completed value. The lower of the two usually binds.
Senior lenders also set conditions before they will fund at all. Development approval in place, a fixed-price building contract with a builder they accept, a quantity surveyor's report, and on residential projects a level of qualifying presales sufficient to cover the debt. These conditions, not the rate, are usually what determines whether a project proceeds.
Mezzanine
Mezzanine finance fills the gap between what senior debt will advance and what the developer can or wants to contribute in equity. It ranks behind the senior debt, usually secured by a second mortgage and often supported by guarantees.
It is materially more expensive than senior debt, and it should be, because in a project that goes wrong the senior lender is repaid in full before the mezzanine lender sees anything. Interest is often capitalised and repaid at the end rather than serviced monthly, since a development produces no income until settlements occur.
The judgement with mezzanine is whether the cost of the layer is smaller than the value of the equity it lets you retain, or of the project you could not otherwise start. Used to bridge a genuine gap on a well-costed project, it works. Used to make a marginal project appear viable, it removes the buffer that would have absorbed the first thing to go wrong.
Equity
Equity is the developer's own capital and that of any partners. It ranks last, absorbs the first losses, and takes the residual profit after every other layer is repaid. Lenders expect real equity in the project because it aligns the developer with the outcome, and a project where the developer has little at risk is priced accordingly by everyone above them.
Equity can be contributed as cash, as the land itself where it was acquired below current value, or by a joint venture partner taking a share of profit. Each has different consequences for control and for how senior lenders view the structure.
How the stack behaves under stress
The reason to understand the order is that development projects rarely go exactly to plan. Costs rise, approvals take longer, settlements slip, and a market can move between the feasibility and the completion.
When that happens, losses are absorbed from the top down. Equity goes first, entirely, before mezzanine takes anything. Mezzanine goes next, entirely, before senior debt is impaired. This is why a modest fall in realised values can wipe out a developer's equity while leaving the senior lender fully repaid, and why the layers are priced as differently as they are.
It also explains why a heavily geared stack is fragile. The thinner the equity layer, the smaller the adverse movement required to reach it.
How the money is actually drawn
Development facilities do not advance in one lump. Land is settled first, then construction is funded progressively against the quantity surveyor's certification of work completed. Interest accrues only on what has been drawn, which is why the facility limit and the interest cost are not proportional. How progressive drawdown works on a commercial construction loan covers the mechanics in detail.
Interest is usually capitalised into the facility rather than serviced, and the facility limit needs to include it. A feasibility that omits capitalised interest and the contingency understates the funding requirement, which is the most common modelling error in small developments.
What to have ready
A feasibility study that stands up to a lender reading it critically: land cost, construction cost with a genuine contingency, professional fees, holding costs, selling costs, capitalised interest, and realistic realisation values supported by comparable evidence rather than by hope.
Development approval or a clear path to it. A builder with the capacity and financial standing to complete. Presales where the project type requires them. And your own track record, which for a first-time developer is the hardest gap to fill and is usually addressed by partnering with someone who has one.
Where to from here
We arrange development finance across senior, mezzanine and private credit sources, and part of the work is telling you when a stack does not have enough equity in it to be worth doing. There are no fees to clients; the lender pays us when the finance settles. Book a 20-minute brief with your feasibility and we will tell you what is fundable before you commit to the site.
Want to talk specifics?
Twenty-minute brief, no obligation.
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