Almost no developer funds a project entirely from personal savings. Instead, projects are financed through a combination of sources known as the capital stack. Understanding each layer helps you structure deals that lenders and investors will support.
Senior Debt
The largest and safest layer is usually a construction loan from a bank or debt fund. Lenders typically finance a percentage of total cost, often in the range of 55 to 70 percent, and release funds in draws as work is completed. Expect interest-only payments during construction, personal or corporate guarantees, and strict reporting requirements.
Mezzanine Debt and Preferred Equity
When senior debt does not cover enough of the cost, mezzanine lenders or preferred equity investors fill the gap. These funds sit behind the senior loan in priority, so they carry higher returns. They are useful for stretching equity but increase overall financing cost.
Common Equity
This is the first-loss capital contributed by the developer and outside investors. Common equity absorbs losses first but captures upside after other layers are repaid. Developers often contribute a smaller share of cash and earn a promote, a larger share of profits, in exchange for managing the project.
Other Funding Sources
- Joint ventures with landowners who contribute land in exchange for a stake
- Crowdfunding platforms that pool smaller investors, where regulations allow
- Government incentives such as tax abatements, grants, or low-cost loans for affordable or revitalization projects
- Seller financing where the landowner accepts deferred payment
What Lenders and Investors Look For
They want a credible track record, realistic budgets, strong market data, adequate contingency, and a clear exit plan. A well-prepared pro forma and a transparent risk discussion go a long way.
Key Takeaway
The cheapest capital is not always the best. Match the financing to the project’s timeline and risk, keep leverage at a level you can survive if the market slows, and negotiate extension options before you need them.