Understanding Debt Stacking: Strategies for Financing Large Developments

Securing finance for large-scale developments can be complex, especially when high capital is required to see a project through multiple phases. Debt stacking, or layered financing, is a strategy that allows developers to layer various funding sources, creating a tailored finance structure that aligns with the unique needs of each stage of development. From mezzanine finance to bridging loans, debt stacking provides developers with flexibility and access to substantial capital.

In this article, we’ll walk through the fundamentals of debt stacking, its benefits, and how developers can leverage this strategy to fund ambitious projects.

What is Debt Stacking?

Debt stacking involves using multiple forms of financing—stacked together in layers—to cover different project stages or needs. Each financing layer contributes a portion of the required capital, offering a structured approach that can include bridging loans, mezzanine finance, and senior debt.

Key Benefits of Debt Stacking:

• Increased Funding Flexibility: Allows access to more capital by combining different finance types.

• Reduced Initial Equity Requirements: Minimizes upfront capital investment for developers.

• Customisable Structure: Each layer can be tailored to align with specific project needs, timelines, and risk levels.

Types of Finance in Debt Stacking

Debt stacking typically involves a combination of the following finance options:

1. Senior Debt

The primary layer of financing, senior debt generally covers the largest portion of project costs. This debt is often secured against the property or assets involved in the development and typically offers lower interest rates due to its lower-risk status.

Characteristics of Senior Debt:

• Lower interest rates

• Priority in repayment over other finance types

• Often provided by banks or institutional lenders

2. Mezzanine Finance

Mezzanine finance is a secondary layer that fills the gap between senior debt and the developer’s equity. This layer is often unsecured, making it a higher-risk option for lenders, but it provides developers with additional funding without diluting ownership.

Benefits of Mezzanine Finance:

• Flexibility in repayment options

• Enhances funding capacity without additional equity

• Can be repaid once the project generates cash flow or is sold

3. Bridging Loans

Bridging loans offer short-term financing to cover immediate costs, such as site acquisition or pre-construction expenses, while developers finalize longer-term funding. Bridging loans are especially beneficial for projects requiring fast capital to prevent delays.

Advantages of Bridging Loans:

• Quick access to funds

• Helps maintain project momentum

• Ideal for filling funding gaps between project phases

How to Structure Debt Stacking for Large-Scale Developments

Debt stacking requires a strategic approach to maximise funding efficiency. Here’s a guide to structuring layered financing for high-value projects:

Step 1: Define Project Funding Needs

Evaluate the total capital required for each project phase. Determine which costs can be covered by senior debt and where mezzanine or bridging finance might be necessary.

Step 2: Arrange Senior Debt

Secure senior debt as the base layer to cover the primary project costs. Most developers source senior debt from traditional banks, ensuring competitive interest rates for this foundational financing.

Step 3: Add Mezzanine Finance for Flexibility

If additional capital is needed after securing senior debt, consider mezzanine finance to enhance funding capacity. This layer allows for increased flexibility, particularly during costly phases, such as mid-construction and pre-sale preparations.

Step 4: Use Bridging Loans to Maintain Cash Flow

For developers needing fast access to funds, bridging loans can act as a safety net during time-sensitive stages. Use this funding layer to ensure cash flow for urgent expenses or when waiting on approval for other finance types.

Step 5: Regularly Monitor Cash Flow and Debt Repayment

With multiple financing sources in place, maintaining a strong cash flow is essential. Regularly monitor each debt layer’s repayment schedule to avoid delays and ensure the project remains on track.

Practical Tips for Effective Debt Stacking

To make the most of debt stacking, developers should adopt the following strategies:

• Choose the Right Lenders: Each layer of financing may come from a different lender. Working with a financial broker, such as LivFinance, can help you find the best options for each type of debt.

• Plan for Exit Strategies: As debt stacking involves multiple repayments, having clear exit strategies, like property sales or refinancing options, is critical to maintain financial stability.

• Align Finance Terms with Project Phases: Each layer of finance should align with specific project stages. For example, short-term bridging loans are ideal for initial costs, while mezzanine finance can cover mid-project expenses.

• Factor in Interest Rates and Fees: Understand the cost implications of each debt layer. Higher-risk loans, like mezzanine finance, often have higher interest rates, so budgeting is essential.

Key Takeaways

• Debt stacking combines multiple finance types to create a flexible, structured funding approach.

• Senior debt, mezzanine finance, and bridging loans each serve distinct roles in supporting large projects.

• Careful planning, clear exit strategies, and consistent cash flow monitoring are essential for successful debt stacking.

Contact LivFinance for Expert Debt Stacking Solutions

Securing the right funding structure is critical to the success of any large-scale development. At LivFinance, we specialise in tailored finance solutions, including debt stacking, to support developers at every project stage. Our expertise in layered financing and connections with top lenders ensure that you get the best possible rates and terms for each debt layer.

Get in touch with LivFinance today to learn how debt stacking can maximise your project’s potential and help you achieve your development goals.