Written by David Lovato – CPC Lending Solutions

April 2025

Property development can often be complex as it encompasses everything from land acquisition to construction and fitout.

To ensure that property development projects can be completed and potentially turn a profit, understanding the different financing options is key. By delving beyond means of senior debt, developers can access another level of funding that could prove beneficial both now and in the future.

Taking up their own space in the capital stack are the opportunities of mezzanine financing and preferred equity financing. Understanding the subtleties between these financing options helps developers answer the common question: “which option is more suitable for my project?”.

What is Mezzanine Financing?

Mezzanine financing is essentially a hybrid of debt and equity that sits between senior debt and common equity in the capital stack. As such, it is often viewed as an option for developers who are looking to bridge a funding gap. 

To understand the intricacies of mezzanine financing and how it might be applicable to a property development project, it’s essential to also acknowledge common terms such as senior debt and capital stack.

As such, senior debt is defined as borrowed money that a company must repay first. As this type of debt has the highest priority, it bears the lowest risk which, in turn, results in lower interest rates. The most common type of senior debt is from financing institutions like banks.

In relation to the capital stack, this is a term used to refer to the layers of capital that have gone into a project. The capital stack highlights who will receive funds or profits and in what order this will take place. 

With this in mind, mezzanine financing is often referred to as the middle layer in the capital stack as it falls between senior debt and any equity. As the debt is secured and falls in this middle layer, such a loan will carry a higher risk profile, resulting in higher interest rates. 

Despite the associated higher interest rates and the potential of lenders imposing stricter borrowing conditions, mezzanine financing is a viable and common option for property development projects. Especially when you consider that it is non-dilutive.

What is Preferred Equity Financing?

Preferred equity is another common financing option utilised by property developers. Preferred equity financing involves the developer giving the lender a stake in the project. In relation to the capital stack, preferred equity sits above common equity but below debts such as mezzanine. 

With this positioning in the capital stack, the provider of preferred equity financing will receive profits and have their debts repaid before common equity stakeholders such as the developer themselves.

This level of ownership also affords the lender or the investor with the ability to be involved in a decision making level. There is also the ability to take control of the project if things are not following the outlined plan.

Key Differences Between Mezzanine and Preferred Equity?

Where mezzanine financing is viewed as bridging the funding gap, preferred equity is seen as sharing the risk and reward of a project. As such, there are many key differences between mezzanine and preferred equity financing for property development funding.

Where mezzanine financing is viewed as bridging the funding gap, preferred equity is seen as sharing the risk and reward of a project. As such, there are many key differences between mezzanine and preferred equity financing for property development funding.

Benefits and Drawbacks of Each Financing Option

As financing options for property development both mezzanine and preferred equity financing have positive and negative aspects that need to be considered. Understanding the intricacies of both will help developers choose the right method of alternative financing for their specific project.

Mezzanine Financing

One of the main benefits of mezzanine financing is the ability to secure funding without having to dilute the share of equity. Additionally, as this method of financing acts as a second mortgage of sorts, there are fixed repayment terms. This helps to provide predictability which plays a large role in having the money set aside to make the payments. It is also worth noting that interest payments may be deducted as an expense, making them tax deductible.

With mezzanine financing there are also negatives to consider, namely, the fact that due to the increased risk, interest rates will be higher. This leads into another negative as with mezzanine financing there is a larger risk involved because of the increased debt and interest obligations. As a secured form of financing, mezzanine lenders have the right to collateral in the case of default which can lead to foreclosure.

Preferred Equity Financing

Preferred equity financing can be a viable option for property developers looking to finance their latest project without increasing debt ratios. For example, this type of financing can be structured flexibly so that investors do not receive additional profits if returns outperform expectations. It’s also worth noting that mandatory interest payments can be deferred during the construction phase to help developers increase cash flow at such a pivotal point in the project.

When opting for preferred equity financing, developers sacrifice both profit and control. With preferred equity, investors will also receive higher returns when compared to mezzanine financing. With preferred equity investors receiving a portion of the profits, developers have to share the reward of their hard work. It’s important to highlight that if preferred equity investors have negotiated voting rights, they can also influence how a project progresses.

When to Choose Mezzanine vs Preferred Equity

When choosing between mezzanine and preferred equity financing it’s important to approach the decision with an outcome in mind. If you’re looking for a tool by which to bridge a gap in funding, mezzanine will be the most obvious choice. For those wanting to share both the risks and rewards of the project with another party, preferred equity is advisable.

The right choice will be dependent upon a variety of different factors as well as project specific features. This is why the risk appetite of the developer and the project’s overall financial profile heavily influence the final decision.

There are situations where one alternative is more suitable than the other. As an example, a project where cash flow is limited may find financing a mezzanine debt difficult. Therefore, rather than going into more debt, the developer leverages preferred equity’s profit participation to access the funds needed to complete the project.

As another example, consider a developer with stable cash flow projections looking to help secure the extra funds needed to help complete a portion of the project that has yet to sell off the plan. Rather than giving up profit participation in the overall project, choosing mezzanine financing means maximising leverage today without diluting ownership tomorrow.

CPC’s Role in Property Development Financing

As a fully independent finance brokerage, CPC Lending Solutions works with developers to find solutions tailored to suit both financial circumstances and the overall goal of the project. All of which lays the foundation needed to structure the right funding mix.

By offering tailored services, CPC Lending Solutions investigates different funding models so that the final outcome – be it undertaking a mezzanine loan, preferred equity financing or a hybrid funding model – is the most suitable for your personal and professional needs.

Development and construction financing models can be complex, however, this highly specialised area of financing is a key skill of CPC Lending Solutions. Our expertise works as a key asset for developers looking to capital stacks to help optimise project returns.

Choosing the Right Financing for Your Project

Funding a property development project can be a complex endeavour. In order to achieve the best outcome possible, developers may need to look at the different layers of the capital stack. In property development financing, key components of the capital stack are mezzanine and preferred equity financing.

While both provide funds to property developers, each financing option has unique characteristics. To choose between taking on a mezzanine loan, which is also referred to as another layer of debt, versus preferred equity financing, where part of the exchange involves sharing control and profits, developers need the right guidance.

CPC Lending Solutions have the experience and expertise to help structure the most suitable financing package for your project, no matter how complex the capital stack may seem. Contact David Lovato on 0434 932 634 or email [email protected] to explore flexible funding options for your next development project.

Written by David Lovato – CPC Lending Solutions

February 2025

When planning to build a new home, a common question asked by borrowers is “Does a construction loan include land?”. Understanding this and how a construction loan works can impact your financial strategy.

A construction loan is a type of short-term financing designed to cover the cost of building a new dwelling or substantially renovating an existing one. Unlike a conventional mortgage, which provides a lump sum upfront for the purchase of an existing property, a construction loan is paid out in stages as your building project progresses. This is also known as ‘drawing down’ your funds.

One of the key differences between a construction loan and a regular mortgage is that you will only pay interest on the amount drawn down in your construction loan. This can help keep your monthly repayments lower.

It is a common assumption in property development financing that construction loans automatically include the cost of the land, too.

Does a construction loan cover land?

Whether or not a construction loan covers land depends on the lender.

Some lenders allow borrowers to bundle the purchase of land with the construction of the dwelling into one home loan. This single loan covers both land acquisition and construction. The loan will be disbursed in stages, with the first release of funds used to purchase the land. Thereafter, the loan functions as a construction loan, paying out in stages as your build progresses.

But, other lenders do not offer a bundled loan, instead allowing separate financing. This might require you to take out a land loan first and then apply for a construction loan once the building plans have been finalised.

From a lender’s perspective, these two options cover a range of scenarios, including developers or borrowers who already own the land and now just require financing to build the dwelling. 

Additionally, for landowners who have low or no debt on their land, some lenders may offer an equity release option. This allows the landowner to access the equity in their land as part of the construction loan, providing additional funds for the project or even for securing their next development. 

In certain scenarios, the lender may provide a cash-out component at the start of construction, allowing developers to secure their next project while the current one is being built. This will depend on maintaining the overall construction maximum loan-to-value ratio (LVR), but it can be particularly helpful for developers managing overlapping projects.

However, this process varies from lender to lender, so it’s recommended you work with an experienced finance broker who can help you find a loan that suits your current financial situation and long-term goals. 

At CPC, we understand that every project is unique. Our approach to property development financing is to work closely with borrowers to understand their specific circumstances and tailor a financing solution that meets their individual needs. We consider the project as a whole, including the land acquisition if necessary, to find a financing solution that works for you.

Key factors that determine construction loan structure

Lenders will assess several criteria when deciding whether a construction loan can include the land purchase. These may include:

• LVR: This represents the percentage of the total project cost (including land) covered by the loan amount. A lower LVR means you will need a larger deposit.
• Borrower’s deposit: If you want to include the purchase of the land in your construction loan, you may need a larger deposit. 
• Construction timeline: Some lenders require construction to commence within a set period after the land purchase. This ensures that the land is used as intended and that the project progresses as stated in the plans.
• Land zoning and permits: Lenders often require approved building plans and necessary permits before approving land financing to reduce the risk of project delays or complications.

Construction loan versus land loan: What’s the difference?

If a bundled loan is not an option for you, or there are other reasons you want to separate the two, it is helpful to know what the differences are between a construction and land loan.

Land loan: This is typically used to purchase vacant land without immediate plans for construction. This type of loan often has shorter terms and higher interest rates than construction loans

Construction loan: This will finance the building of the dwelling and is drawn down in stages. Borrowers will likely be required to provide approved plans to the lender.

How CPC helps borrowers finance land and construction

At CPC Lending Solutions, we understand that every borrower’s situation is different. Whether you need a construction loan for land and building, a separate land loan, or alternative financing options, we can help find a solution that aligns with your property development goals.

Our expertise is in property development financing, which allows us to find flexible and tailored loans for your project’s needs. Working with a specialised lender like CPC Lending Solutions means you have access to more knowledge of the industry as well as personalised service. 

If you’re exploring how to finance land and construction, our team at CPC can guide you through the process. Contact CPC Lending Solutions today to discuss your construction and land financing needs.

 

Written by David Lovato – CPC Lending Solutions

December 2024

The Australian housing market has seen a growing divergence in the value of new builds compared to older homes. This trend has been influenced by factors like energy efficiency, maintenance costs and changing buyer preferences.

Energy efficiency and minimum standards

Under the Nationwide House Energy Rating Scheme (NatHERS), the National Construction Code (NCC) introduced a minimum 6-star rating (out of 10) for new builds from 2010 and adjusted the mandate recently to a minimum of seven stars. 

These standards ensure that newly built homes automatically include superior insulation, efficient heating and cooling systems, and measures to reduce dampness and mould and improve overall comfort.

In its December 2024 report “Amped up: How energy resilient are Australian homes?”, CoreLogic noted that a typical home built in 2010 or later achieves a median star rating of 5.9 out of 10, compared to just 2.8 stars for homes built earlier.

This disparity places older homes at a disadvantage, particularly for environmentally conscious buyers or renters.

Growing buyer and investor demand for energy efficiency

Savvy buyers, both owner-occupiers and investors, are increasingly willing to pay a “green premium” for homes with higher energy efficiency. A Domain report from May 2024 found that energy-efficient houses sold for 14.5% more, while efficient units fetched an 11.7% premium. In some areas, price differences were as high as 28%.

This willingness to pay more reflects a combination of long-term savings on running costs and the improved comfort offered by new builds.

Lender requirements

Lenders are increasingly factoring energy efficiency into their decisions, with many becoming reluctant to approve loans or provide coverage for homes with poor energy ratings.

Real Estate Institute of Australia director Jacob Caine told the Australian Financial Review, “We will see in the not-too-distant future almost mandatory requirements in lending from financial institutions for those properties that don’t meet minimum standards.”

He added that lenders may start adding clauses to contracts on home loans for older homes that agree to provide the finance only if upgrades are undertaken.

We are already seeing this trend, with the introduction of a federal government-led Clean Energy Finance Corporation fund which provides cheaper loans to homeowners wanting to make their homes more energy efficient. This mortgage option is currently available through Westpac and Bank Australia.

Government rebates and incentives

State governments are prioritising programs to upgrade existing housing stock. Financial incentives, such as rebates and grants, aim to help homeowners retrofit properties to meet modern efficiency standards. 

For example, the ACT’s Home Energy Support program provides up to $5,000 in rebates to help with the cost of installing energy-efficient products. New South Wales offers the Energy Savings Scheme providing financial incentives to install energy-efficient equipment and appliances. Victoria’s Energy Upgrades offers discounts on energy-efficient products when replacing old, outdated appliances. 

But, even with these programs, the cost of replacing or upgrading existing appliances or energy systems can add up, putting further upward pressure on existing home prices in comparison to new homes that come already fitted with energy-efficient systems. 

Other incentives

For apartment developers, incentives are already in place through embedded energy networks. Providers like Energy Australia offer “free infrastructure” (such as hot water plants and equipment) to developers in exchange for residents sourcing their electricity through the embedded network. This lowers construction costs while making new apartments more appealing to buyers.

Running costs 

To meet NatHERS requirements, new homes are often equipped with energy-efficient features including solar panels, water tanks and double-glazed windows. These help reduce running costs.

Domain’s May report found that:

• Roof and ceiling insulation can save up to 45% on heating and cooling
• Wall insulation can save around 15% on heating and cooling
• Sealing gaps around windows and doors can save 5-15% on heating and cooling

In contrast, older homes often require costly upgrades to achieve similar savings, such as installing insulation, replacing appliances or retrofitting windows. Without these improvements, owners of older homes may face higher utility costs that can deter buyers or renters.

Cooking and appliances also contribute significantly to a home’s running costs. As the image below shows, an average NSW household uses 40% of its energy on cooking and appliances.

New homes are typically fitted with energy-efficient appliances that meet current performance standards, such as induction cooktops, LED lighting and high-rated refrigerators and washing machines. These energy-efficient appliances consume far less power than their outdated counterparts in older homes, saving the homeowner or tenant on their running costs. 

Future-proofing your investment

For investors, energy efficiency plays an important role in both capital appreciation and rental demand.

First, tenants are increasingly prioritising energy efficiency, with 72% of renters surveyed by PropTrack saying energy ratings help reduce their utility bills.

Second, in some locations like Victoria, landlords must already meet minimum energy standards for rental homes, and more regulations are under consultation. Retrofitting older homes to comply with these standards could be costly, further widening the price gap between new and existing homes.

Lenders’ interest rate discounts for energy-efficient homes and government incentives to upgrade older stock are clear signals that efficiency will play a central role in the market moving forward. For investors, newly built homes that meet NatHERS standards offer an opportunity to attract renters, save on running costs, and avoid costly retrofits.

CPC Lending Solutions is a property development and residential finance specialist. Whether you’re a developer needing funding for land, construction, or residual stock, or a buyer looking for the perfect mortgage, we’re here to help. Contact us at [email protected] or fill in this form.

Written by David Lovato – CPC Lending Solutions

October 2024

As interest rates have risen sharply over the last two years, the share of non-performing commercial real estate (CRE) loans at banks has increased, according to the Reserve Bank of Australia (RBA).

While this uptick may cause some concern, it’s worth noting that these levels remain low by historical standards. In fact, according to the RBA, “There continues to be little evidence of financial stress among owners of Australian CRE.”

Even in this challenging interest rate environment, now is a prime time to consider refinancing your loans in anticipation of potential interest rate cuts next year.

Interest rates forecast

According to the big four banks, the Australian Securities Exchange (ASX) and many other economists, the RBA is likely to start cutting rates early next year. 

The global economic landscape is already trending downwards. Last month, the US Federal Reserve made its first interest rate cut. This followed several other big economies including the UK, Canada, China and Europe which have also begun their rate-cutting cycles.

And, because Australia typically follows a similar trend to these developed economies, it indicates we are likely nearing the end of the current cycle.

With rates set to ease and economists predicting cuts early next year, now is an ideal time to explore refinancing options. Waiting until the end of the year could leave you scrambling as the market slows during the holiday season, making it more difficult to explore loan options or secure approvals.

Fixed rates or not?

As you review your refinancing options, you’ll need to decide between a fixed-rate mortgage or a variable rate. Currently, some fixed rates are lower than variable rates, which may seem tempting. However, fixing your rate now could prevent you from benefiting when rates are cut further in 2025, as widely expected.

But, fixing rates now could lock you out of potential savings in the near future. If you fix your rate now and the RBA cuts rates multiple times in 2025 – as is expected – you could miss out on the lower payments that variable rates will offer next year.

Some borrowers have already seen potential savings with fixed rates, as some banks have begun lowering their rates (see table summarising lenders offering rates below 5.75%).

However, borrowers should keep in mind the longer-term benefits of not fixing rates.

For developers and investors, there’s a bigger picture. By choosing not to fix now, you’ll maintain the flexibility to adjust your strategy as rates continue to shift downwards, maximising your project’s profitability.

Private credit options

In the real estate sector, the private credit market is growing significantly. Private lenders who have matured over the last several years are actively looking for new sites and projects to finance. According to the RBA, as of July, around 11% of business lending and one-quarter of lending to small businesses was provided by non-bank lenders.

With traditional banks tightening their lending criteria, private lenders may fill that gap as an alternative source of funds for CRE.

Private lenders offer the flexibility and speed to capitalise on opportunities in a softening interest rate environment. Whether you are looking to refinance an existing project, purchase a new site or secure residual stock loans to buy time until rates fall, there are attractive options.

Now is the time to act

Whether you’re a borrower or an investor, now is the moment to explore your refinancing options. If you have an existing loan, refinancing could help you lock in lower interest rates and reduce your monthly repayments.

For developers, the current rate environment also presents an opportunity to invest in new projects. Market conditions are favourable for acquiring sites and starting developments, with the growing private credit market offering flexible and attractive funding options

Additionally, savvy developers can take advantage of residual stock loans, which offer temporary financial relief while planning their next move. These loans help bridge the gap until rates drop further, giving you more time to strategise.

CPC Lending Solutions is a property development and residential finance specialist. Whether you’re a developer needing funding for land, construction, or residual stock, or a buyer looking for the perfect mortgage, we’re here to help. Contact us at [email protected] or fill in this form.