Most developers know that a senior development lender will not fund an entire project. What catches many out is the size of the gap between what the senior lender will advance and what the scheme actually costs. That gap, the equity requirement, is often the hardest part of a development to fund. This guide explains how development funding is typically layered, where mezzanine and stretched senior structures fit, and what lenders expect to see before they commit.
How a development capital stack is built
A typical scheme is funded from several layers. The senior loan sits first in line and is usually sized against both the cost of the project and its gross development value (GDV), commonly funding a proportion of land and build costs. The developer’s own equity sits at the bottom. Between the two there may be a gap that the developer needs to fill, either with more cash or with additional finance.
- Senior debt. The cheapest layer, with first charge over the site, drawn in stages against the build programme and monitored by a surveyor.
- Mezzanine finance. A second layer of debt, ranking behind the senior lender, that reduces the equity the developer must contribute. It is priced higher to reflect the greater risk and requires the senior lender’s consent through an intercreditor arrangement.
- Stretched senior. A single facility that covers both layers at a blended rate, simplifying the legal structure compared with two separate lenders.
- Equity partners. A joint-venture investor provides capital in exchange for a share of the profit rather than interest.
What lenders look at
Lenders assess the project and the borrower together. On the project they examine the planning position, the build costs and contingency, the appraisal, the exit plan and the market for the finished units. On the borrower they examine track record, the professional team, and the developer’s own financial strength. A first-time developer can still obtain finance, but usually on lower leverage or with an experienced contractor and project manager, while an experienced developer with completed schemes can often negotiate better terms.
Profit on cost and on GDV are central ratios. Lenders typically want to see a margin large enough to withstand a fall in sales values or a rise in costs, and stress-test the appraisal accordingly. Higher leverage through mezzanine funding reduces that safety margin, which is why it is priced and scrutinised more heavily.
The cost of filling the gap
Every additional layer increases the overall cost of funds, so the question is whether the extra leverage improves the return on the developer’s own equity by more than it costs. With the Bank of England Bank Rate at 3.75% following the September 2026 decision to hold, pricing differs significantly across lenders and layers, and fees, exit fees and profit shares need to be added to the headline interest rate. Developers should model the full cost against a realistic and a pessimistic sales programme before committing.
High-net-worth developers and additional security
Some developers, including high-net-worth individuals with other property or assets, offer additional security over an existing property to reduce the cash equity they must put in. This can reduce the cash needed, but it exposes that other asset to the risk of the project, so the downside should be considered carefully with independent advice.
Plan the exit from day one
The exit determines whether the structure works: sale of the completed units, or refinancing onto a term investment loan. Where a scheme is complete but unsold, development exit finance can repay the build loan and give more time to sell. For the foundations, our guide to ground-up development loans in 2026 explains how the senior facility is structured and drawn.
Next steps
See our development funding service page for how we approach ground-up and conversion schemes, and the Bridging and Development Finance Hub for related guides. To discuss the capital stack for a specific project, contact Giles Finance with your appraisal, or see the areas we cover for local context.
Development finance is generally unregulated business lending and is not covered by the FCA’s mortgage conduct rules. Your property or other assets offered as security may be repossessed or sold if the loan is not repaid.
Giles Finance is a trading style of Giles Finance & Consultancy Services, authorised and regulated by the Financial Conduct Authority (FRN 726857).