Development funding is the financial backbone of every construction project, covering everything from land acquisition and site preparation to vertical building and final stabilization. Whether you are building a single commercial property or an entire subdivision, understanding how development funding works gives you a major advantage when structuring deals and negotiating with lenders.
For builders navigating the capital markets in 2026, the landscape has shifted. Banks now require more equity from developers, interest rates on construction loans remain elevated at 6.5% to 9% for commercial projects, and alternative financing sources like mezzanine debt and preferred equity are playing a bigger role than ever. This guide breaks down every layer of the funding process so you can approach your next project with confidence.
If you are a builder or developer planning a construction project, Clearhouse Lending can help you navigate the funding process from day one. Our team specializes in horizontal construction loans and vertical construction loans structured to match your project timeline. Reach out today to discuss your financing options.
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What Are the Main Sources of Development Funding?
Development funding comes from three primary sources: senior debt, mezzanine financing, and equity. Most builders use a combination of these sources, known as the capital stack, to cover 100% of project costs while balancing risk and return for each participant.
Senior debt is the largest piece of the puzzle and typically covers 60% to 75% of total project costs. This comes from traditional banks, credit unions, or specialized construction lenders. Senior debt sits at the bottom of the capital stack, meaning these lenders get repaid first if anything goes wrong. Because of this priority position, senior debt carries the lowest interest rates, generally ranging from 6.5% to 9% for commercial construction loans in the current market.
Mezzanine financing fills the gap between what a senior lender provides and what the project needs. According to Wall Street Prep, mezzanine debt typically covers 10% to 20% of costs, carrying higher interest rates of 12% to 18% because it sits behind senior debt in repayment priority. This layer allows developers to reduce their equity requirement without exceeding the senior lender's comfort level.
Equity represents the developer's own capital and any outside investor contributions. Equity holders take on the most risk because they are last in line for repayment, but they also capture the most upside if the project succeeds. Most lenders require developers to contribute at least 10% to 25% of total costs as equity to demonstrate commitment to the project.
Beyond these three pillars, some builders also access government programs, tax increment financing (TIF), grants, or bridge loans for short-term needs like land acquisition before permanent financing is in place.
How Does the Development Funding Process Work from Start to Finish?
The development funding process follows a predictable sequence that typically takes 30 to 90 days from initial application to closing, though complex projects can require longer timelines. Understanding each step helps builders prepare the right documentation and avoid delays.
The process begins with pre-development planning, where the builder assembles a complete project package. This includes architectural plans, a detailed construction budget, market analysis, projected returns, and proof of entitlements or zoning approvals. Lenders evaluate all of this before moving forward.
Next comes the loan application and underwriting phase. According to First Merchants Bank, construction loan approval typically takes 30 to 60 days because there are more variables to assess than a standard mortgage. The lender reviews the borrower's experience, financial strength, project feasibility, and the local market. A third-party appraisal determines the project's as-completed value, which establishes the loan-to-value ratio.
Once approved, the loan closes and the draw period begins. Funds are not disbursed as a lump sum. Instead, they follow a draw schedule tied to construction milestones. The builder requests draws as work is completed, and the lender verifies progress through inspections before releasing each payment.
The final stage is stabilization or exit. Once construction is complete, the builder either sells the finished product, refinances into permanent financing, or leases the property to generate income. The construction loan is repaid in full at this point, and any mezzanine or equity investors receive their returns based on the agreed terms.
What Is the Typical Capital Stack for a Development Project?
The capital stack is the layered structure of all funding sources used to finance a development project. A typical capital stack for a commercial construction project includes 60% to 70% senior debt, 10% to 20% mezzanine debt or preferred equity, and 15% to 25% common equity from the developer and investors.
The exact breakdown depends on the project type, the developer's track record, current market conditions, and the risk profile of the deal. In the more conservative lending environment of 2025 and 2026, banks have tightened their standards, reducing loan-to-cost (LTC) ratios from the 75% to 80% range down to 65% to 70% for many projects. This means builders need to bring more equity or find additional mezzanine capital to close the gap.
For example, a $10 million subdivision project might be funded with $6.5 million in senior construction debt (65%), $1.5 million in mezzanine financing (15%), and $2 million in developer equity (20%). The senior lender holds first lien position, the mezzanine lender holds a subordinate position, and the equity investors own the project and bear the most risk.
Understanding the capital stack is critical because it determines your cost of capital, your risk exposure, and your potential returns. A well-structured stack balances leverage with safety, ensuring the project can absorb cost overruns or delays without defaulting. If you need help structuring your capital stack, use our commercial mortgage calculator to model different scenarios.
How Do Senior Debt and Mezzanine Financing Work Together?
Senior debt and mezzanine financing complement each other by allowing builders to access more total leverage than senior debt alone would permit. Senior lenders typically cap their exposure at 65% to 75% of total project costs, while mezzanine lenders bridge the gap to 80% to 90% of costs, reducing the equity the developer must contribute.
The relationship between these two layers is governed by an intercreditor agreement. This legal document defines each party's rights, including repayment priority, foreclosure procedures, and notification requirements. The senior lender always holds first priority, meaning they get repaid before the mezzanine lender in any liquidation scenario.
Because mezzanine lenders accept a subordinate position, they charge higher interest rates to compensate for the added risk. According to Primior Group, mezzanine rates typically range from 12% to 20%, compared to 6.5% to 9% for senior construction debt. Mezzanine financing can be structured as a second-position loan, preferred equity, or even a participation arrangement where the mezzanine provider shares in project profits.
For builders working on subdivision projects, this layered approach is especially valuable. Horizontal construction loans cover site work like grading, utilities, and roads, while mezzanine financing can help cover the equity gap that would otherwise come entirely from the developer's pocket. You can learn more about structuring these deals in our guide on how to finance subdivision development.
What Role Does Equity Play in Development Funding?
Equity is the foundation of every development deal because it represents the capital that absorbs losses first and captures profits last. Lenders require developers to have meaningful equity in a project - typically 15% to 25% of total costs - to ensure the builder has "skin in the game" and is financially motivated to complete the project successfully.
Developer equity can come from several sources. Cash contributions from the builder's own reserves are the most straightforward form. Some developers also contribute land they already own as equity, with the land value counted toward their required contribution. According to JPMorgan Chase, the equity layer often includes both common equity (from the developer) and preferred equity (from outside investors seeking fixed returns).
Outside equity investors - including family offices, private equity funds, and high-net-worth individuals - often participate in larger development projects. These investors typically expect returns of 15% to 25% or more, reflecting the higher risk they accept compared to debt holders. Their capital allows builders to take on bigger projects than they could fund with personal resources alone.
The amount of equity required directly impacts project feasibility. If a project needs 25% equity on a $20 million development, the builder must source $5 million. This is why many developers seek mezzanine financing to reduce their equity requirement to a more manageable level. For a deeper look at how developers structure financing for subdivision work, read our guide on how developers get subdivision financing.
Looking for development funding for your next project? Clearhouse Lending works with builders across the country to structure construction loans and development financing packages that fit your specific project needs. Contact our team to get started.
How Do Draw Schedules and Disbursements Work?
Draw schedules are the mechanism through which construction loan funds are released to the builder over time, rather than as a single lump sum at closing. According to Procore, a draw schedule details how loan proceeds will be disbursed over the project timeline, specifying what purpose each draw serves and at what construction milestone it occurs.
The typical draw process works in four steps. First, the builder completes a defined phase of work, such as foundation pouring, framing, or rough-in for mechanical systems. Second, the builder submits a draw request to the lender with documentation including invoices, lien waivers from subcontractors, and updated cost tracking. Third, the lender sends a third-party inspector to verify that the work has been completed to the specified standard. Fourth, once the inspection is approved, the lender disburses the funds, typically within 5 to 10 business days.
Most construction loans have 5 to 8 draw periods over the life of the project, though some lenders allow monthly draws for larger developments. Each draw is typically tied to a percentage of completion rather than a fixed dollar amount, which protects the lender from over-advancing funds.
An important feature of construction loan draws is that interest only accrues on the amount that has been disbursed, not the full loan commitment. This means a builder with a $5 million loan who has only drawn $2 million pays interest only on that $2 million. This structure helps preserve cash flow during the early stages of construction when revenue is typically zero.
What Are the Costs Associated with Development Funding?
The total cost of development funding extends well beyond the interest rate. Builders should budget for origination fees, inspection costs, legal expenses, appraisal fees, and interest carry when calculating the true cost of financing a project.
Origination fees for construction loans typically range from 1% to 2% of the total loan amount, paid at closing. According to New Silver, additional closing costs add approximately 2% of the loan amount on top of origination. For a $5 million construction loan, this means $50,000 to $100,000 in origination fees plus another $100,000 in closing costs.
Interest rates vary significantly by loan type and borrower profile. NAHB data from 2025 shows land development loans averaging 11.77%, speculative single-family construction loans at 12.82%, and pre-sold construction loans at 12.73%. Commercial construction loans from banks generally range from 6.5% to 9%, while mezzanine financing adds 12% to 20% on the subordinate layer.
Other costs to budget for include third-party inspection fees ($300 to $500 per inspection, with 5 to 8 inspections typical), appraisal fees ($3,000 to $10,000 for commercial projects), environmental reports, title insurance, and legal fees for loan document preparation. Builders should also factor in an interest reserve, which many lenders require to be built into the loan to cover interest payments during construction. Use our commercial bridge loan calculator to estimate carrying costs for your specific project.
How Long Does It Take to Secure Development Funding?
Securing development funding typically takes 30 to 90 days from application to closing, though the timeline depends heavily on the complexity of the project, the completeness of the borrower's documentation, and the lender's internal processes.
For straightforward projects with experienced builders, bank construction loans can close in as little as 30 to 45 days. The Federal Savings Bank notes that construction loans have more moving parts than traditional mortgages, which adds time to the approval process. Lenders must review detailed plans, budgets, contractor qualifications, market studies, and environmental reports before issuing a commitment.
More complex deals involving multiple capital sources take longer. If a project requires both senior debt and mezzanine financing, the intercreditor agreement alone can add 2 to 4 weeks to the closing timeline. Projects requiring government approvals, environmental remediation, or specialized entitlements may take 6 months or longer before financing can be finalized.
Builders can accelerate the process by preparing a comprehensive loan package before approaching lenders. This package should include detailed architectural and engineering plans, a line-item construction budget, a project schedule with milestones, market comparables, a personal financial statement, and a track record of completed projects. Having all documentation ready before the first meeting with a lender can shave weeks off the approval timeline.
Frequently Asked Questions About Development Funding
What is the minimum down payment for a development loan?
Most lenders require builders to contribute 15% to 25% of total project costs as equity. The exact requirement depends on the lender, the project type, and the borrower's experience and financial strength. Some government-backed programs like HUD 221(d)(4) allow loan-to-cost ratios as high as 85% to 90%, reducing the equity requirement for qualifying projects.
Can I use land I already own as equity for a development loan?
Yes, many lenders accept land equity as part of the required equity contribution. The land is typically appraised at its current market value, and that value is credited toward the equity requirement. If you purchased land for $500,000 and it is now worth $800,000, the $800,000 value may count toward your equity contribution, reducing the cash you need to bring to closing.
What happens if construction costs exceed the original budget?
Cost overruns are one of the biggest risks in development funding. Most lenders require a contingency reserve of 5% to 10% built into the construction budget to handle unexpected costs. If overruns exceed the contingency, the builder typically needs to contribute additional equity to cover the shortfall. Some loan agreements include provisions for budget modifications, but these require lender approval.
What is the difference between a construction loan and a development loan?
A construction loan specifically finances the building of a structure, while a development loan covers a broader scope that may include land acquisition, entitlements, site preparation, infrastructure installation, and construction. Development loans for subdivision projects often include horizontal construction phases like grading, utility installation, and road building before any vertical building begins.
Do I need to have a general contractor to get development funding?
Most lenders require that a licensed general contractor be part of the project, though some allow experienced developer-builders to self-perform work. Lenders evaluate the contractor's financial stability, insurance coverage, bonding capacity, and track record of completing similar projects on time and within budget. Having a reputable contractor on your team strengthens your loan application.
How do interest reserves work on a construction loan?
An interest reserve is a portion of the loan set aside at closing to cover interest payments during the construction period. Instead of requiring the builder to make monthly interest payments out of pocket, the lender draws from the reserve to cover accrued interest. This preserves the builder's cash flow during construction when the project is not generating any income. The reserve is calculated based on the projected draw schedule and the loan's interest rate.
If you are ready to explore development funding for your next construction project, Clearhouse Lending is here to help. We offer construction and development financing for builders and developers nationwide, with loan structures tailored to subdivisions, commercial builds, and mixed-use projects. Our advisors can walk you through the capital stack options and help you find the right fit. Schedule a free consultation today.