When capital tightens, structure decides who absorbs the loss
Written by
David Lovato, Founder and Director, CPC Lending Solutions
Construction and development finance specialist | Licensed Credit Representative CRN 542282 | Member of Loan Market Group (LMG)
Published 17 September 2026
Development finance structure is the arrangement of senior debt, mezzanine debt and equity across a project, and the security, ranking and exit conditions attached to each layer. When funding is cheap and values are rising, a weak structure rarely shows. When rates rise and sale prices soften, structure decides who carries the loss.
Two things happened in the past month that put this in front of every Australian developer.
A market that is testing structures
In August, administrators were appointed to Universal Property Group and associated companies in the Bathla Group, a business ABC News reported had disclosed $3.2 billion in liabilities as at June 2025, funded across dozens of separate lending relationships. No finding has been made that the way the group structured its finance caused its difficulties, and none is suggested here. What the situation shows is how a highly leveraged business with many lenders behaves when sales slow, costs stay high and refinancing gets harder at once.
At the same time the cost of capital is moving. The US Federal Reserve lifted its target range to 3.75 to 4.00 per cent on 16 September, its first increase since July 2023, which feeds through to the wholesale markets Australian non-bank lenders fund themselves in. Domestically the cash rate has been at 4.35 per cent since May; the Board left it there in August while describing policy as “somewhat restrictive”, and another increase is widely anticipated at the 29 September meeting. Treat the direction as your planning assumption and the timing as unknown.
Where structure decides the outcome
Three things matter more than the headline rate.
Ranking. Senior debt is repaid first, mezzanine debt second, and equity last. The senior lender holds first-ranking security and can enforce, appoint a receiver and sell. Everyone behind it is a spectator to their own project.
Security. Cross-collateralisation means security for one facility can also secure another, and cross-default means a default on one facility can trigger one elsewhere. Both are common and neither is improper, but together they turn a contained problem into a portfolio-wide one.
Exit. Most development facilities are short and assume a defined repayment: presale settlements, a residual stock facility, a sale or a refinance. A structure that only works if the exit happens on schedule, at the forecast price, has a single point of failure.
Leverage is where it bites first
High leverage is not a problem until the sale price moves, and then it is the only problem.
Structures taking total gearing into the nineties as a percentage of end value have been readily available in this market, typically a stretched senior facility around 65 per cent of end value with preferred equity layered above it. On a rising market that works. At 94 per cent of end value, a single-digit movement in sale prices consumes the developer’s margin entirely and starts to reach toward the capital behind it. The junior lender feels it before the senior one does.
A lot of projects were funded at peak values on close to maximum gearing and are now settling into a softer market. Gearing to the limit a lender will allow is a decision about how much room you have if the valuation is wrong. It deserves to be made deliberately rather than by default. Sizing that buffer is one of the first conversations CPC has on any new file.
How CPC can help
Most structural problems are cheap to solve before a term sheet is signed. Almost none are solvable afterwards.
Set gearing you can survive — not just the maximum a lender allows.
Comparing structures rather than headline rates and setting gearing at a level the project can absorb is where CPC starts. The right answer depends on the site, the programme and the presale position. CPC arranges development finance and construction finance file by file, across bank, non-bank and private capital — each carries different pricing, security requirements and flexibility.
Match the right capital to your project — and know when not to layer it.
Mezzanine finance and preferred equity solve real problems, at a real cost in return and control. Our private lending guide explains how the non-bank channel is structured and when it is the better fit. Knowing when not to use layered capital matters as much as knowing how.
Plan the exit and close funding gaps before they become expensive.
Refinancing, residual stock and off-the-plan settlement facilities work best when arranged early, not when a facility is about to mature. CPC tests the funding requirement across the whole project rather than to the next drawdown, so a shortfall surfaces with time to deal with it.
Frequently asked questions
Does a rising cash rate change how a development loan is structured?
It changes the assumptions the structure depends on. Higher rates increase holding costs, tighten feasibility margins and can alter what a refinancing lender will advance at maturity. The structural response is usually a longer term, a more realistic extension mechanism and more contingency built into the programme — rather than a different headline rate.
How much gearing is too much?
There is no single figure, but the practical test is whether the project survives a three-month delay and a five per cent movement in sale prices without needing new capital at short notice. If it does not, the gearing is too high for the risk being carried.
What should a developer check in a term sheet before accepting it?
What the security covers and whether it extends to other projects. Whether cross-default provisions exist. How an extension is triggered and priced. What the lender can require if a valuation moves. What the facility assumes about the exit. Each is negotiable before signing and fixed afterwards.
Talk to CPC before the term sheet arrives
If you have a development project at any stage — feasibility, site acquisition, construction or refinancing — CPC can review the proposed structure and test it against the funding requirement across the whole programme.
