Understanding the Capital Stack

The capital stack is a fundamental concept in property development finance, referring to the layers of funding that combine to finance a development project. Understanding how senior debt, mezzanine finance, and equity interact is essential for any Fulham developer looking to optimise their funding structure and maximise returns on capital. Each layer of the stack carries a different risk profile, cost, and set of terms, and getting the balance right can have a significant impact on your project's profitability.

Senior debt sits at the bottom of the capital stack and represents the lowest-risk position for lenders. In Fulham, senior development finance typically covers 60-70% of total project costs at rates from 0.65% per month. The senior lender takes a first legal charge over the property and has priority in any repayment scenario. Because of this protected position, senior debt offers the most competitive rates in the stack. Most Fulham developments will have senior debt as their primary funding layer, with the developer contributing equity to cover the remaining costs.

Mezzanine finance occupies the middle layer of the capital stack, sitting between senior debt and equity. This second-charge facility can increase your total leverage to 85-90% of project costs, significantly reducing the equity you need to contribute. Mezzanine rates in Fulham typically range from 1.0-1.5% per month, reflecting the higher risk position. An intercreditor agreement governs the relationship between the senior and mezzanine lenders, establishing clear priority in the event of default. Mezzanine finance is particularly useful for developers who want to preserve capital for multiple projects or who need to bridge a gap between their available equity and the senior lender's maximum advance.

Equity sits at the top of the capital stack and bears the highest risk but also captures the greatest upside. Developer equity represents your own cash contribution to the project, while equity partners or joint venture investors may also participate at this level. In Fulham's strong market, equity investors are attracted by the potential for premium returns, particularly on well-located schemes in desirable neighbourhoods. Some developers choose to bring in equity partners to fund 100% of project costs, sharing profits in return for eliminating their personal cash contribution entirely.