The capital stack is the hierarchy of funding sources used to finance a property development project. It explains who gets paid first, who takes on more risk, and how developers can structure finance to unlock higher leverage or reduce their upfront cash contribution.
Key Takeaways
- The capital stack outlines the repayment order, risk level and expected return of each capital source
- Senior debt is secured and lowest cost, while equity layers carry higher risk and return expectations
- Mezzanine finance and preferred equity help developers reduce the cash they need to contribute
- Understanding the stack improves feasibility modelling and lender engagement
- Strategic structuring strengthens a project’s ability to secure funding in tight lending conditions
Understanding the Capital Stack
The capital stack shows every funding layer involved in a development project and where each party sits in terms of security, control and repayment priority. Lenders and investors use it to assess risk. Developers use it to structure finance efficiently so projects can progress without delays caused by capital shortfalls.
Most development capital stacks include senior debt, mezzanine finance, preferred equity and common equity. Each layer is priced differently because each carries a different level of risk.
Senior Debt: The Base Layer of the Stack
Senior debt forms the foundation of most projects, as it is the cheapest capital available. Banks and non-bank lenders typically provide senior debt based on conservative loan to cost ratios, presales and valuation criteria.
Because senior debt is secured by a first mortgage, it carries the lowest interest rate and is repaid ahead of every other capital contributor. In most cases, senior lenders fund around 55 to 65 percent of total development costs. Developers who need greater flexibility often consider specialist lenders, particularly when traditional criteria slow down approvals. MFEG’s construction loans are commonly used in these situations.
Mezzanine Finance: Bridging the Funding Gap
Mezzanine finance sits above senior debt and below equity in the capital stack. Developers turn to mezzanine when the bank will not fund the full amount needed for acquisition or construction. By inserting mezzanine, they can reduce the amount of common equity required while still keeping the project moving.
Mezzanine lenders take more risk because their loan is subordinated to the senior lender, often secured by a second mortgage or a caveat. This results in a higher expected return, but it is often still more cost effective than contributing additional developer equity. Developers seeking to improve leverage often use MFEG’s mezzanine finance solutions to support acquisition or construction phases.
Preferred Equity: A Flexible Alternative to Mezzanine
Preferred equity sits between mezzanine finance and common equity. It provides capital without the need for a second mortgage, which can simplify documentation for both developers and senior lenders.
Preferred equity investors typically receive fixed or coupon-style distributions with priority over common equity holders. It is particularly useful when a project has strong fundamentals but still requires additional funding to reduce the developer’s cash contribution. Developers who want to understand how the structure works often refer to MFEG’s updated explainer on what preferred equity is and how it works.
Common Equity: The Highest-Risk Layer
Common equity represents the developer’s own capital or that of JV partners. Because this layer carries the greatest exposure, it also captures the largest share of profit if the project performs well.
Common equity is repaid last and does not carry fixed distributions. It is required to demonstrate commitment to the project and to satisfy lenders. Developers often look to reduce their common equity portion using mezzanine or preferred equity as long as feasibility still supports the structure.
Why the Capital Stack Matters for Developers
A well-structured capital stack is one of the strongest tools a developer can use when preparing a project for lender assessment or investor funding.
Better Leverage and Lower Cash Contribution
A mix of senior debt, mezzanine finance and preferred equity can materially reduce the amount of equity the developer needs to inject.
Improved Borrowing Power
Strong structuring helps meet lender requirements and demonstrates financial discipline, supporting smoother approvals for property development finance.
Better Risk Management
Understanding repayment order and risk exposure helps developers and investors clearly assess potential downside and required returns.
Clearer Investor Communications
When the capital stack is well-defined, investors can see exactly where they sit in the repayment hierarchy and how their returns will be prioritised.
The MFEG Approach to Capital Structuring
Melbourne Finance & Equity Group works with both developers and wholesale investors to structure capital stacks that balance leverage, cost and control. MFEG’s approach is built around practical, real-market conditions, including presale pressure, rising construction costs and tightening bank criteria.
By combining solutions such as land loans, mezzanine finance, preferred equity and short-term private lending, MFEG helps developers assemble the right structure to progress acquisition and construction phases efficiently. Many developers explore these pathways through the MFEG Borrowers hub to understand what options align with their project.
Final Thoughts and Next Steps
Understanding the capital stack gives developers the confidence to structure projects, negotiate financing and balance risk and return in a more strategic way. The right stack can improve project feasibility, support stronger lender engagement and unlock capital that would otherwise slow down a development.
Speak With MFEG About Structuring Your Project
Whether you need senior debt, mezzanine finance, preferred equity or short-term capital, MFEG can help you structure a funding model that supports your project objectives.
Contact us today!