The Capital Stack in Property Development: How to Structure Your Funding

The capital stack is one of the most important concepts in property development finance, yet it is widely misunderstood by newer developers entering the UK market. In its simplest form, the capital stack describes the layered structure of all the funding sources used to finance a development project. Each layer sits in a hierarchy based on its priority of repayment and the level of risk it carries. Understanding how these layers interact is fundamental to structuring any deal, whether you are building a single house or a 200-unit residential scheme worth £40 million or more.

At its core, the capital stack typically has three layers. At the bottom sits senior debt, which is the most secure form of lending and therefore carries the lowest cost. In the middle you find mezzanine finance, which fills the gap between the senior debt and the developer's own equity. At the top sits the equity contribution from the developer or their investors. Each layer has different risk and return characteristics, and the way you combine them determines your overall cost of capital and, crucially, how much of the profit you retain.

We frequently work with developers who focus exclusively on the interest rate of their senior debt without considering the full capital stack. This is a mistake. A developer who borrows at 7% on senior debt but needs to give away 50% of their profit to an equity partner may end up worse off than one who pays 9% on a stretched senior facility but retains all the upside. The capital stack must be viewed holistically, and that is exactly what we help our clients achieve through our deal room advisory service.

Senior debt forms the base of nearly every development capital stack in the UK. This is the first-charge loan secured against the development site and the works being carried out upon it. Because senior lenders have the first claim on the asset in the event of default, their risk is the lowest of any capital provider, and this is reflected in the pricing. Typical senior debt rates for development finance currently range from 6.5% to 10% per annum depending on the borrower profile, scheme complexity, and geographic location.

Senior lenders will typically fund between 55% and 70% of the total project cost, or 55% to 65% of the Gross Development Value (GDV). On a £5 million GDV scheme, that means the senior lender might provide between £2.75 million and £3.25 million. The remaining funding must come from other sources in the capital stack. The gap between what senior debt provides and the total project cost is commonly referred to as the equity gap, and bridging this gap is where structuring becomes creative.

In our experience, the terms you achieve on senior debt are heavily influenced by two factors: developer track record and scheme quality. An experienced developer with three or more completed projects can often secure 65-70% Loan-to-GDV at competitive rates. A first-time developer working on the same scheme might only achieve 55-60% LTGDV with a rate premium of 200-300 basis points. The quality of your planning consent, your contractor appointments, and your development appraisal all influence where you sit on this spectrum.

Mezzanine finance occupies the middle layer of the capital stack and is one of the most powerful tools available to UK property developers. It sits behind the senior debt as a second charge and ahead of the developer's equity in the repayment waterfall. Because mezzanine finance carries more risk than senior debt, it commands a higher price, typically ranging from 12% to 20% per annum depending on the overall leverage and project risk profile.

The primary purpose of mezzanine finance is to reduce the amount of equity a developer needs to contribute. On a £3 million total development cost where senior debt covers £2 million (67%), mezzanine finance might cover an additional £600,000 (20%), leaving the developer to contribute just £400,000 (13%) from their own resources. Without mezzanine, the developer would need to find £1 million of equity. This leverage effect means developers can take on more projects simultaneously or tackle larger schemes than their cash reserves alone would allow.

We have arranged mezzanine facilities ranging from £150,000 on small residential conversions to over £8 million on major mixed-use developments. The key to successfully incorporating mezzanine into your capital stack is ensuring that the overall blended cost of finance still leaves you with an acceptable profit margin. As a rule of thumb, if your total finance costs (senior plus mezzanine interest, fees, and charges) exceed 60% of your projected profit, the deal may be over-leveraged. For a deeper comparison of how mezzanine stacks up against equity partnerships, see our guide on mezzanine versus equity joint ventures.

The equity layer sits at the top of the capital stack and represents the developer's own financial contribution to the project. This is the highest-risk capital because equity investors are the last to be repaid. If the development makes less profit than expected, or even makes a loss, it is the equity holder who absorbs the downside. Conversely, once all debt is repaid, the equity holder captures all the remaining upside. This risk-reward dynamic is what makes property development attractive to entrepreneurial investors willing to accept concentrated exposure.

Equity can take several forms. The most straightforward is cash in the bank. However, many developers contribute equity through land value. If you purchased a site for £500,000 two years ago and it is now valued at £750,000, that £750,000 counts as your equity contribution even though you only invested £500,000 of cash. Some lenders will even recognise planning uplift as equity, meaning the increase in land value attributable to obtaining planning permission. We have structured deals where developers contributed zero cash equity because their land value, plus planning uplift, exceeded the lender's equity requirement.

For developers who lack sufficient equity, equity joint ventures provide an alternative. An equity partner contributes the required cash in exchange for a share of the development profit. Typical equity JV splits range from 50/50 to 60/40 in favour of the developer, depending on how much non-financial value the developer brings through expertise, planning consents, and project management. The cost of equity is therefore variable and directly linked to project performance, unlike debt which carries a fixed interest rate regardless of outcome.

There is no single correct way to structure a capital stack. The optimal structure depends on your objectives, your available equity, your risk tolerance, and the specific characteristics of the development. A developer building their tenth scheme with £2 million in the bank will structure very differently from a first-time developer with £200,000 and a site with planning permission. The art of deal structuring lies in matching the right capital sources to the right project at the right time.

We typically advise developers to start with a target profit margin and work backwards. If you need to achieve a 20% profit on GDV to justify the risk of a development, you should model the capital stack to ensure that all finance costs, including interest, fees, and any equity profit share, leave you with that minimum return. On a £4 million GDV scheme with total costs of £3.2 million, your target profit would be £800,000. If your total finance costs (across all layers of the stack) consume more than £200,000 to £250,000 of that, you may want to adjust the structure.

One approach we frequently recommend is to start with the maximum senior debt available, then model different mezzanine and equity combinations to find the sweet spot. For example, on a project where senior debt covers 65% LTGDV at 7.5%, you might compare: (A) mezzanine at 15% covering another 15% of costs, with 20% developer equity; versus (B) no mezzanine, but an equity JV partner contributing 35% for a 40% profit share. In scenario A, your finance cost is fixed and predictable. In scenario B, your finance cost is variable but potentially higher if the project performs well. Submit your project through our deal room and we will model both scenarios for you.

The most frequent error we see is developers maximising leverage without considering the impact on total cost. Borrowing 90% of your total project cost sounds attractive because it minimises your equity outlay, but the blended interest rate on a highly leveraged stack can be ruinous. We reviewed a deal last year where a developer was paying 7% on senior debt, 18% on mezzanine, and had given away 50% of profits to an equity partner. The combined cost of capital left them with a projected profit of just 6% on GDV on a scheme that should have delivered 22%. The structure was wrong, and the developer had not modelled the full picture.

Another common mistake is failing to align the capital stack with the project timeline. Development finance typically runs for 12 to 24 months. If your build programme is 18 months and your mezzanine facility is only available for 12 months, you will face a refinancing gap that creates unnecessary cost and uncertainty. Every layer of the stack must be coordinated so that facilities overlap correctly and exit strategies are aligned. For guidance on planning your loan repayment, see our article on development finance exit strategies.

Finally, many developers overlook the intercreditor dynamics between their senior lender and mezzanine provider. These two parties need to agree on how decisions are made if the project encounters difficulties. An intercreditor deed governs this relationship, and its terms can significantly impact your position as the developer. We always recommend having your solicitor review the intercreditor terms before committing to a layered capital stack, as unfavourable provisions can give one lender the power to enforce against your project even when the other lender is content with progress.