How to structure a 90%+ LTC capital stack

Achieving 90 percent plus loan to cost on a development is not magic, it is architecture. Here is how experienced developers assemble a capital stack that minimises equity and maximises return on it.

The building blocks

A high-leverage stack has three layers:

1. Senior debt (55 to 70% of cost): your primary development loan from a bank or specialist lender, first charge. Construction Capital covers this market whole of market.
2. Mezzanine (15 to 30% of cost): second-charge gap funding from a mezzanine lender such as Max Mezz.
3. Developer equity (5 to 15% of cost): your cash contribution, the only layer that is not debt. Where even that is more than you want to commit, JV equity partners can share the layer in exchange for a profit split.

Worked example: a £5m cost scheme

Getting to 90 percent plus

The factors that decide your maximum leverage:

• Track record. Five or more completions usually means better terms.
• Profit on cost. A minimum of 20 percent, ideally 25 percent plus.
• Planning status. Full permission in place, conditions understood.
• Location. Demonstrable demand with recent comparable sales.
• Exit strategy. A clear, achievable sales or refinance programme.

The intercreditor agreement

The critical document in any senior plus mezzanine structure is the intercreditor agreement. It governs:

• Drawdown priority and payment waterfalls
• Default and enforcement rights
• Cure periods and standstill arrangements
• Reporting obligations to each lender

Blended cost of capital

Mezzanine looks expensive in isolation. The number that matters is the blended cost across the whole stack. At 90 percent LTC with senior at 7.5 percent and mezzanine at 15 percent, the blended rate is roughly 10 percent a year, and your return on the equity you actually deployed is dramatically higher than in a low-leverage structure.