The capital stack is the complete structure of funding used to finance a property development. Understanding how different layers of finance work together — and the cost and risk implications of each — is essential for optimising your development's financial performance.
This guide breaks down each layer of the capital stack, explains when to use different combinations, and provides practical guidance for structuring the funding for your Chelsea development.
What Is the Capital Stack?
The capital stack represents the total capital invested in a property development, arranged in order of priority for repayment. At the bottom sits the most senior (lowest risk, lowest return) capital, and at the top sits equity (highest risk, highest return).
In a typical Chelsea development, the capital stack might look like this: Senior Debt (60-70% of costs) at the base, Mezzanine Finance (15-20%) in the middle, and Developer Equity (10-25%) at the top.
The key principle is that lower layers get repaid first. If a project runs into difficulty, senior debt holders are repaid before mezzanine lenders, who are repaid before equity investors. This hierarchy of risk is reflected in the cost of each layer.
Senior Debt
Senior debt is the foundation of most development finance structures. Secured as a first charge against the property, it offers the lowest cost of capital in the stack. Typical parameters include: up to 70% of total costs, up to 65% of GDV, rates from 0.65% per month, arrangement fees of 1-2%.
In Chelsea, senior debt facilities typically range from £500,000 to £15 million, though larger facilities are available for exceptional schemes. The senior lender will instruct a RICS valuer and monitoring surveyor to protect their position.
Senior debt is drawn down in stages as construction progresses, with each drawdown certified by the monitoring surveyor. This staged approach reduces the lender's risk and means you only pay interest on funds actually drawn.
Mezzanine Finance
Mezzanine finance fills the gap between senior debt and the developer's equity contribution. Secured as a second charge behind the senior lender, mezzanine carries higher risk and therefore commands higher returns — typically 1-2% per month.
Adding mezzanine to your capital stack can increase your total borrowing from 70% to 85-90% of project costs. This significantly reduces the equity you need to contribute, improving your return on equity — though at the cost of higher overall finance charges.
Mezzanine lending requires an intercreditor agreement between the senior and mezzanine lenders, which sets out how decisions are made if the project encounters difficulties. Your broker and solicitor will manage this process.
In Chelsea, mezzanine finance is particularly useful for developers who want to pursue larger schemes without tying up all their available capital in a single project.
Developer Equity
Developer equity is the capital you contribute from your own resources. This sits at the top of the capital stack — last in, first out — meaning it bears the highest risk but captures the largest share of profits.
In a standard senior-only structure, you'll need to contribute 30-35% of total project costs as equity. With mezzanine, this can reduce to 10-15%. With a development equity partner, your cash contribution can be as low as zero — though you'll share a significant portion of profits.
The right equity contribution depends on your available capital, risk appetite, and the number of projects you want to run simultaneously. Contributing less equity per project allows you to diversify across multiple developments, but increases your overall leverage and finance costs.
Optimising Your Capital Stack
The optimal capital stack balances three factors: cost of capital (lower leverage = lower finance costs), return on equity (higher leverage = higher ROE), and risk (higher leverage = less margin for error).
For Chelsea developments with strong GDV support and experienced developers, a senior-plus-mezzanine structure often provides the best balance. The relatively high property values in Chelsea mean that even modest GDV assumptions can support comfortable debt coverage ratios.
Discuss your capital stack options with your development finance broker before committing to a project. At Chelsea Development Finance, we model multiple scenarios to help you identify the structure that best meets your objectives.