The capital stack in property development is the order your funding sits in, from the cheapest, safest money at the bottom to the most expensive, riskiest money at the top, and it decides two things you care about: who gets paid back first, and what each dollar of funding costs you. A typical Australian development might be funded by senior debt at the base, then mezzanine finance, then preferred equity, then the developer’s own ordinary equity at the top. The lower a layer sits, the lower its risk and its rate; the higher it sits, the more it charges, because it is further back in the queue if the project disappoints.
This guide is written for the developer building that stack and working out what it does to the deal. It covers what each layer is and what it currently costs in the Australian market, the repayment waterfall that decides who gets paid in a good outcome and a bad one, why banks cap senior debt where they do, when an extra layer beats writing a bigger equity cheque, how to work out the blended cost of the whole stack, how the picture shifts by state and in New Zealand (NZ), and the mistakes that quietly erode margin. Every rate and ratio here is indicative. Pricing moves with the cash rate, the project, and the sponsor, so treat the numbers as a starting point for your own modelling, not a quote.
What is the capital stack in property development?
The capital stack is the full set of funding layers behind a development, ranked by who gets repaid first and who carries the most risk. Most Australian development stacks are built from four layers: senior debt at the bottom, then mezzanine finance, then preferred equity, then ordinary (common) equity at the top. As Australian lenders describe it, the capital stack is the hierarchy of funding sources that explains who gets paid first, who takes on more risk, and how developers structure finance to reduce the cash they have to put in.
Two rules run through the whole structure, and they run in opposite directions. Repayment runs from the bottom up: senior debt is repaid first, then mezzanine, then preferred equity, and ordinary equity is paid last with whatever is left. Risk and return run from the top down: ordinary equity takes the first loss and earns the highest return when the project performs, while senior debt takes the last loss and earns the lowest rate. Australian development lenders describe the same logic: the capital stack sets out who gets paid first and who carries the most risk, with the reward rising as you move up the layers. That inversion is the single most useful thing to hold in your head. The layer that is cheapest to you is cheapest because it is safest for the funder, and the layer that is most expensive is expensive because it stands closest to the downside.
A generalised Australian development stack, expressed as a share of Total Development Cost (TDC), tends to look something like the table below. Specific deals vary widely, so read these as typical bands rather than fixed figures.
| Layer | Typical share of Total Development Cost (TDC) | Indicative cost | Security and ranking |
|---|---|---|---|
| Senior debt | 55 to 70 per cent | 7 to 11 per cent per annum | First mortgage; repaid first |
| Mezzanine finance | 10 to 20 per cent | 14 to 22 per cent per annum | Second mortgage or caveat; repaid after senior |
| Preferred equity | 5 to 15 per cent | 10 to 14 per cent per annum coupon | Equity ranking, no mortgage; paid after all debt |
| Ordinary equity | 10 to 25 per cent | The project’s target return | Residual; first loss, last paid |
Not every project uses all four layers. A small two-townhouse build may run senior debt and ordinary equity only, with nothing in between. A larger apartment project with a tight equity position may use all four. The point of understanding the stack is that each layer you add changes both your equity cheque and the cost and risk profile of the whole deal, which is why the stack is worth modelling deliberately rather than assembling by default.
How does the capital stack decide who gets paid, and in what order?
The capital stack is repaid as a waterfall: sale proceeds fill the most senior claim first, and only what spills over reaches the next layer down. Senior debt is repaid in full (principal plus its interest) before the mezzanine lender sees a dollar; the mezzanine claim is cleared before preferred equity; preferred equity takes its capital and its preferred return before ordinary equity; and the developer’s ordinary equity collects whatever remains. In a wind-up or a forced sale, the same order holds, which is why preferred equity ranks below all debt but ahead of common equity, and why ordinary equity is described as the first-loss layer.
A worked example makes the priority concrete. Take a project with a $20 million Total Development Cost (TDC), funded by $13 million senior debt, $3 million mezzanine, $1.5 million preferred equity, and $2.5 million ordinary equity. If the completed development sells well and net proceeds after selling costs come to roughly $25 million, the waterfall pays the senior debt and its capitalised interest, then the mezzanine and its coupon, then returns the preferred equity with its preferred return, and the ordinary equity holder keeps the rest. That residual is where the developer’s profit lives, so in a good outcome the layer that was last in line earns the most.
Now stress the same deal. Suppose a softer market drops net sale proceeds to about $16 million. The senior debt of $13 million plus roughly $1 million of capitalised interest is repaid in full, taking $14 million. That leaves $2 million. The mezzanine lender, owed around $3.4 million with its coupon, recovers only part of its claim and takes a haircut. Preferred equity and ordinary equity recover nothing, and the developer’s $2.5 million is gone before any other party feels real pain. The numbers are illustrative, but the sequence is the rule: equity absorbs the downside first, which is the entire reason it commands the highest return when things go right. Modelling that downside, rather than only the base case, is what separates a stack that survives a soft market from one that only works on the brochure.
This is also why the shape of the stack drives the project’s peak funding need. The more of the cost that debt carries, the larger the balance outstanding before sales start repaying it, and the deeper the funding exposure the project has to carry. A stack is a cashflow decision as much as a financing one; it sets the cash position the project has to survive month by month.
Senior debt: the base of the stack
Senior debt is the first-mortgage loan that funds the largest share of the project and costs the least, because it sits at the front of the repayment queue. It is the foundation every other layer is built on, and for most Australian developments it covers somewhere between 55 and 70 per cent of Total Development Cost (TDC). A senior lender takes a registered first mortgage over the site, sets the gearing it will go to, and is repaid ahead of every other funder from sale proceeds. Everything above it in the stack exists to fill the gap between what the senior lender will advance and what the project actually costs.
What does senior debt cost, and how much will a lender advance?
Senior debt is the cheapest money in the stack, indicatively around 7 to 11 per cent per annum in the current market, and a lender sizes it against both cost and value. The cost test is the Loan to Cost Ratio (LTC), the loan as a percentage of Total Development Cost (TDC). The value test is the Loan to Value Ratio (LVR), the loan as a percentage of the project’s end value, usually its Gross Realisation Value (GRV). A development lender generally runs both and advances to whichever produces the smaller facility, so a developer should model both and watch the lower one.
Where the gearing lands depends heavily on the lender type. Major banks tend to sit at the conservative end, often around 60 to 65 per cent of Total Development Cost (TDC) and paired with the strongest pre-sale and serviceability conditions. Non-bank and specialist lenders generally go higher, often 70 to 75 per cent, accepting more risk for a higher rate. Pricing tracks the cash rate: the Reserve Bank of Australia (RBA) cash rate sits underneath senior margins, which are set on top of it. Because development interest is usually capitalised into the cost base, a higher cash rate enlarges the very Total Development Cost (TDC) the Loan to Cost Ratio (LTC) is measured against.
Pre-sales are often the other half of the senior decision. For residential apartment projects a bank will typically require qualifying pre-sales covering a large share of the committed debt before it funds construction, though this is a matter of bank credit practice rather than a hard regulatory rule. The Australian Prudential Regulation Authority (APRA) has clarified that it sets no minimum pre-sale requirement, and the long-standing 100 per cent figure reflected industry practice rather than a prudential standard. A growing group of non-bank senior lenders will now write development finance with no pre-sales, underwriting instead to Gross Realisation Value (GRV), project margin, and exit strategy, but they price that absorption risk into a higher rate and usually a lower gearing. The pre-sale condition is not a side detail; it can decide whether the senior layer funds at all, and therefore how much the layers above it have to cover.
Why do banks cap senior debt where they do?
Banks cap senior gearing because the prudential framework treats development lending as a higher-risk category and makes it more expensive for them to hold. Lending for land acquisition, development and construction (ADC) is regulated under the Australian Prudential Regulation Authority (APRA)‘s Prudential Standard APS 220 Credit Risk Management, which requires an authorised deposit-taking institution (ADI) to maintain prudent credit policies and lets the Australian Prudential Regulation Authority (APRA) limit how much of this development lending a bank does. On the capital side, land acquisition, development and construction (ADC) exposures carry a higher risk weight under the standardised approach to credit risk, which means a bank has to hold more capital against a development loan than against a standard mortgage. More capital tied up means a lower return on that loan, so banks ration this kind of lending and keep their gearing conservative.
That prudential reality is why so much development debt has moved to non-bank lenders, and why the stack now leans on private credit, which the Reserve Bank of Australia (RBA) has flagged as a fast-growing part of the financial system. Non-bank lenders are not bound by the same capital rules, so they can gear higher and move faster, which is exactly why a developer chasing a higher Loan to Cost Ratio (LTC) often ends up with a private senior lender or a layered structure. The trade-off is cost and scrutiny: the Australian Securities and Investments Commission (ASIC) has turned its attention to the sector, and its private credit surveillance report (REP 820), published in November 2025, flagged opaque fees, inconsistent disclosure, and weak conflict management across the funds it reviewed. For a developer the practical read is that non-bank senior debt is available and flexible, but the all-in cost and the fine print deserve close reading.
Mezzanine finance: filling the gap above senior
Mezzanine finance is a layer of subordinated debt that sits above senior debt and below equity, used to fill the gap when the senior facility stops short of what the project needs. When a bank funds 65 per cent of Total Development Cost (TDC) and the developer does not have the other 35 per cent in equity, a mezzanine tranche can cover part of that gap, secured behind the senior lender. The most useful way to think about mezzanine finance is as substitute equity priced as debt: the mezzanine lender takes equity-like risk, second behind a senior on a project that is cash-flow negative until completion, but is structured as a creditor with a contractual rate and a hard maturity.
Mezzanine is more expensive than senior debt because it ranks behind it. Australian mezzanine coupons in 2026 typically sit in the 14 to 20 per cent per annum range, with weaker projects pushing 22 to 24 per cent, and the interest is generally capitalised rather than paid in cash because the project produces no income until settlement. On top of the coupon, lenders usually charge an establishment fee of a few per cent of the facility, and some take an equity participation, a contractual share of project profit, on top of the rate. The security is usually a registered second mortgage or a caveat behind the senior lender’s first mortgage, or a charge over the shares in the special purpose vehicle (SPV) that owns the project.
With mezzanine layered behind the senior debt, the combined Loan to Cost Ratio (LTC) can reach 85 to 90 per cent of total project cost, which is how a thinly capitalised developer gets a deal funded. The question that decides whether to use it is mathematical: mezzanine lifts your return on equity (ROE) when the project’s return comfortably exceeds the mezzanine rate, and erodes it when the margin is too thin to carry the cost. As a rough guide that holds across many Australian projects, mezzanine tends to be attractive on deals with a healthy profit-on-cost and a real contingency buffer, and becomes uneconomic on thin-margin deals where the cost of the mezzanine eats the developer’s residual. The mezzanine finance guide works through that mezzanine-versus-equity decision in detail.
Preferred equity: equity that gets paid before yours
Preferred equity is investor capital that ranks as equity but is paid ahead of the developer’s ordinary equity, sitting above all debt’s claim on security but below it in the repayment queue. It carries a preferred return, a hurdle rate the project must clear before the developer’s ordinary equity receives any distribution, and in a sale or wind-up preferred equity is paid only after all debt is satisfied, ahead of common equity. It behaves more like a partner with priority than a lender with security.
The practical difference between preferred equity and mezzanine is the one developers most often blur. Mezzanine is debt: it takes a registered second mortgage or caveat and pays a fixed coupon. Preferred equity is equity: there is usually no registered mortgage, and instead of a contractual coupon it carries a preferred return that can be paid in cash or accrued as payment-in-kind (PIK) and rolled up to the exit. Because preferred equity is equity rather than a loan, it is commonly raised from wholesale investors through a managed investment or syndicate structure overseen by the Australian Securities and Investments Commission (ASIC), rather than written under a credit facility, which is part of why it is more common in larger raises than in small townhouse deals.
Pricing reflects its position. Indicative ranges in the current Australian market may sit around 10 to 14 per cent per annum for a hard preferred equity coupon, with softer or blended structures targeting a higher internal rate of return (IRR) once a profit share is included. The absence of a second mortgage is the feature senior lenders often prefer, because it keeps the security structure clean: a senior lender that will not consent to a second mortgage behind it may be comfortable with preferred equity sitting above the developer’s ordinary equity instead. For a developer, preferred equity can fill the gap above the debt layers without adding another fixed-maturity loan to repay, at the cost of giving an investor priority over your own return.
Ordinary equity: the developer’s own money, last in line
Ordinary equity, also called common equity, is the developer’s own capital (and that of any joint venture partners), and it sits at the top of the stack as the first money lost and the last money repaid. It earns no fixed return and carries no security. In exchange for standing behind every other funder, ordinary equity captures the residual, every dollar of profit left after senior debt, mezzanine, and preferred equity have been paid. As Australian lenders put it, common equity is repaid last but captures the largest share of profit when the project performs.
Two things follow for a developer. First, ordinary equity is the most expensive money in the stack even though it has no quoted rate, because the return it demands, your target project return, is higher than any lender charges. That is why funding a project entirely from your own equity is rarely the cheapest option on a return-on-equity basis: each dollar of your own capital is dear, and replacing some of it with cheaper debt can lift your return on equity (ROE) if the deal supports it. Second, lenders require a minimum ordinary equity contribution for a reason beyond their own buffer. Real capital at risk is skin in the game; a developer with their own money in the deal has an incentive to deliver, which is why a higher Loan to Cost Ratio (LTC), meaning less of your own equity, reads as higher risk and prices accordingly.
Ordinary equity does not have to be cash. The equity already sitting in a site you own can count toward your contribution, as can planning and design costs you have already paid, which can reduce or remove the further cash a lender asks you to inject. Where a developer cannot or does not want to fund the full equity layer alone, the gap is often filled by bringing in equity partners or syndicating the raise, which is its own discipline.
What does the whole stack cost you?
The cost of the capital stack is the blended, or weighted average, cost of every layer, and it sits between the cheap senior rate and the expensive equity return. To work it out, weight each layer’s cost by its share of the funding and add them up. Using the example stack from earlier, senior debt of $13 million at 8 per cent, mezzanine of $3 million at 18 per cent, preferred equity of $1.5 million at 12 per cent, and ordinary equity of $2.5 million at a 20 per cent target return, the annual cost of capital is roughly $2.26 million on $20 million of funding, a blended cost of about 11.3 per cent per annum. That single number, the weighted average cost of capital (WACC), is what the project actually has to out-earn to create value.
The blended figure is where the gearing trade-off becomes visible. Each layer you add above senior debt raises the blended cost of capital, because every layer above senior is dearer than senior. But each layer also shrinks the ordinary equity cheque, and because ordinary equity is the most expensive money of all, replacing some of it with mezzanine or preferred equity can lift your return on equity (ROE) provided the project return clears the cost of the new layer. Push the gearing too far and the maths reverses: the blended cost rises faster than the project earns, the break-even point moves against you, and a modest fall in Gross Realisation Value (GRV) wipes the residual. This is the same relationship the internal rate of return (IRR) measures over time, and it is why a higher-geared stack shows a higher headline return but a thinner margin for error.
The honest version of this calculation includes everything, not only the coupons. Establishment fees, line fees, an equity participation on a mezzanine tranche, and the preferred return hurdle on preferred equity all add to the true cost, so a stack that looks like 11 per cent on the headline rates may cost more once fees and profit shares are counted. Modelling the all-in cost of each layer, and stress-testing it against a softer Gross Realisation Value (GRV) and a longer timeline, is the difference between a stack that prices the risk and one that hopes the risk does not show up.
How do you structure the capital stack for your deal?
Structure the stack by starting from the project’s margin and working out which constraint binds, because that decides how much debt the deal can carry and how much equity you must find. On a fat-margin project, where end value sits well above cost, the value test is generous and the cost test usually binds, so senior debt fills most of the gap and you may need little above it. On a thin-margin project, where Gross Realisation Value (GRV) and Total Development Cost (TDC) sit close together, the value cap can fall below the cost cap and bind first, leaving a larger gap for the dearer layers to fill, which is exactly when the development margin on the deal decides whether the stack is even affordable.
From there the sequence is practical. Size the senior debt to the binding ratio. Work out the gap between that facility and Total Development Cost (TDC). Then decide how to fill the gap: more ordinary equity, a mezzanine tranche, preferred equity, or a smaller project. The choice is rarely about preference and almost always about the numbers, whether the project return clears the cost of the next layer with a buffer for cost overruns and a softer market. Adding a layer that the margin cannot carry does not rescue a marginal deal; it just moves the loss from the developer to whoever sits closest above them in the stack, and prices accordingly.
This is the work a feasibility model is built for. Feasly models the full funding stack, senior, mezzanine, preferred and ordinary equity, with capitalised interest, and treats the Loan to Value Ratio (LVR) and Loan to Cost Ratio (LTC) as binding constraints that size each facility, so the gearing you negotiate to is the gearing the model is built on. You can run the repayment waterfall through to the equity layers to see what the ordinary equity actually keeps in a base case and a downside before you commit. Modelling the stack and its waterfall together, rather than sizing the debt and hoping the equity return follows, is what turns a financing structure into a feasibility you can stand behind.
Does the capital stack change from state to state?
The mechanics of the capital stack do not vary by state, because development funding is a national market: the layers, their ranking, and the repayment waterfall work the same way in Perth as in Sydney. What does vary by state is the cost base the stack has to fund, and the appetite a lender brings to a given market. That distinction matters more than a state-by-state retelling of the same four layers would.
The cost base shifts because state taxes and charges differ. Stamp duty (transfer duty) on the land, land tax during the holding period, and developer contributions all vary between jurisdictions, and each one enlarges the Total Development Cost (TDC) that senior debt is geared against and that equity has to backstop. A higher acquisition-duty state pushes more cost into the base of the model, which can move the binding ratio and change how much of the stack the cheaper layers can cover.
Lender appetite is the other variable. A senior lender’s gearing and pre-sale conditions reflect its read of the local market, the depth of buyer demand, absorption rates, and price trend in the suburb, so the same project can attract a higher Loan to Cost Ratio (LTC) in a deep metropolitan market than in a thin regional one. New South Wales (NSW) and Victoria (VIC) carry the deepest lender panels and the most active non-bank competition; Queensland (QLD) sits close behind; and South Australia (SA), Western Australia (WA), Tasmania (TAS), the Australian Capital Territory (ACT), and the Northern Territory (NT) can see narrower panels and more conservative terms on larger or more specialised projects. The stack you can assemble is partly a function of where the project sits, even though the structure of the stack itself does not change.
How does the capital stack work in New Zealand?
The capital stack works the same way in New Zealand (NZ) as in Australia, with senior debt, mezzanine, and equity ranked in the same order, but the funding market is smaller and the bank appetite is tighter. New Zealand (NZ) major banks have stayed conservative on development lending, cherry-picking lower-risk transactions and leaving non-bank lenders to fill the gap, many of them funded from Australia. The result is a stack that often leans more heavily on non-bank senior debt and mezzanine than an equivalent Australian deal would.
Mezzanine is correspondingly dearer in New Zealand (NZ). Local commentary puts the total cost of mezzanine debt commonly in the 15 to 25 per cent range, and higher for riskier positions, reflecting the thinner pool of subordinated lenders. Senior development funding follows similar logic to Australia, geared against cost and end value with pre-sale or pre-commitment conditions, and the same non-bank flexibility on pre-sales is increasingly available to New Zealand developers.
Two structural differences are worth carrying into a New Zealand (NZ) feasibility. First, there is no stamp duty in New Zealand, so the acquisition-duty line that enlarges an Australian cost base is simply absent, which changes the cost the stack funds. Second, the Goods and Services Tax (GST) rate is 15 per cent rather than Australia’s 10 per cent, which feeds through the cost and revenue sides of the model. Project timing is the other consideration, because consenting risk affects how a lender prices and conditions debt: the Resource Management Act (RMA) reform reshaping the planning system changes the timeline and certainty a funder underwrites against, and a longer or less certain consent path tends to tighten terms across the stack.
Common mistakes developers make with the capital stack
The most expensive capital-stack mistakes come from modelling the stack loosely rather than precisely, and they recur across deals. The list below is the handful worth checking before you commit.
Quoting gearing without naming its basis. A “75 per cent” facility means little until you say 75 per cent of what. Loan to Cost Ratio (LTC) is measured against Total Development Cost (TDC); Loan to Value Ratio (LVR) is measured against Gross Realisation Value (GRV). They produce different facility sizes, and a lender lends to the lower one, so a number without its basis hides the test that may be doing the work.
Modelling the coupon, not the all-in cost. A mezzanine tranche quoted at 16 per cent can carry a true cost several points higher once establishment fees, line fees, and an equity participation are counted, and a preferred return hurdle works the same way. Pricing a layer at its headline rate understates what it takes out of the residual.
Forgetting that capitalised interest enlarges the base. On most development facilities the interest is not paid monthly but added to the balance, and lenders expect that capitalised interest to sit inside the Total Development Cost (TDC) the ratios are measured against. Leaving it out flatters the Loan to Cost Ratio (LTC) and understates the equity required.
Treating mezzanine and preferred equity as the same thing. They occupy a similar position in the stack, but mezzanine is debt with a second mortgage and a fixed coupon, while preferred equity is equity with a preferred return and usually no mortgage. The difference changes the cashflow during the build, the security a senior lender will accept, and the order of the exit.
Stress-testing only the base case. A stack that works at the planned Gross Realisation Value (GRV) can wipe the equity on a modest fall, because ordinary equity is the first-loss layer. Running the waterfall against a softer market and a longer timeline shows whether the structure survives a normal disappointment or only the brochure outcome.
The capital stack in one view
The capital stack is a ranking of risk and return, and a developer who reads it that way can structure a deal deliberately instead of by default. Senior debt sits at the base: cheapest, first repaid, capped by the prudential framework and by the lower of the Loan to Cost Ratio (LTC) and Loan to Value Ratio (LVR). Mezzanine finance fills the gap above it as subordinated debt, dearer and second in line. Preferred equity sits above the debt as priority equity, paid before the developer’s own money. Ordinary equity sits at the top, last repaid and first lost, earning the residual and therefore the highest return. Repayment runs bottom-up; risk runs top-down; and the blended cost of the whole stack is what the project has to out-earn.
The practical work is to size the senior debt to the binding ratio, fill the gap only where the margin can carry the cost, model the all-in cost of every layer, and run the repayment waterfall through a downside before committing. Do that, and the stack stops being a financing afterthought and becomes part of how the feasibility is built. This guide is general information for developers and not financial advice; rates, ratios, and lending conditions move with the market and with the deal, so confirm the current position with your lender, broker, and adviser, and model your own numbers before you rely on them.