Building a Capital Stack
Developers love to talk about the building. But the thing that actually decides whether a project gets built, and whether it makes money, is the capital stack: the layered structure of funding that determines who gets paid first, who carries the most risk, and how the profits get split. A $5 million mixed-use building in Muskegon might be financed with $3.5M in senior debt, $750K in equity, a $500K Brownfield TIF reimbursement, and a $250K local grant or PILOT. Each layer behaves differently, and knowing how they fit together is what separates developers who get funded from ones who don't.
Here's how a capital stack comes together in West Michigan, from the bottom up.
Senior Debt: The Foundation
At the base sits senior debt, the mortgage from a bank, credit union, or institutional lender. Terms typically run 60 to 75% loan-to-cost, 4 to 8% interest, and 20 to 25-year amortization, secured by a first mortgage on the property. One thing that genuinely matters in this market: local lenders like Mercantile Bank, Horizon Bank, and Choice One often prefer regional projects with clear local impact, and relationships carry real weight alongside the numbers. The lender who knows your track record will move faster than the one reading a cold application.
Mezzanine Financing: The Bridge
When a project needs more than the bank will lend, mezzanine financing fills the gap. It's secured by a pledge of ownership interest rather than the property itself, carries rates from 10 to 15%, and is usually short-term, two to five years. A Muskegon developer who needs an extra $400,000 to finish a retail-residential infill can use mezzanine money to bridge until the building stabilizes and refinances. It's more expensive than senior debt by design, it's taking more risk, but it keeps a viable project from stalling for want of a final slug of capital.
The Equity Layers
Above the debt sits equity, in two flavors. Preferred equity investors receive a fixed preferred return, say 8 to 10%, before any profits are shared, common in syndications and joint ventures. Common equity is the developer's own cash or sweat equity, the highest risk, but the position that gains the most when the project succeeds. A Grand Haven mixed-use project offered investors an 8% preferred return plus 30% of the profits at sale, a structure that balanced risk and reward attractively enough to actually raise the money.
Public Incentives: The Gap Fillers
This is where Michigan developers gain an edge. Non-traditional tools, Brownfield TIF, PILOT agreements, MEDC grants, local programs, can fill the gap that debt and equity won't cover, and stacking them can reduce your out-of-pocket equity by 10 to 30%. On that $5 million West Michigan project, the result is roughly 70% debt, 15% combined equity, and 15% public incentives, a deal that stabilizes with strong ROI and durable cash flow precisely because the incentives took pressure off the equity.
The Numbers That Tell You If It Pencils
A stack only works if the metrics behind it hold up. Track your loan-to-cost (total debt divided by project cost), your debt service coverage ratio (net operating income divided by annual debt service, aim for at least 1.25), your equity multiple (total cash returned divided by invested equity), and your IRR over the holding period. There's a hard truth in development worth remembering: projects rarely fail for lack of opportunity, they fail for lack of capital discipline.
The Mistakes That Sink Stacks
The usual suspects are overleveraging without an exit strategy, underestimating soft costs like legal, permits, and reserves, forgetting capitalized interest, mistiming a refinance or sale, and poor communication with lenders or investors. The simplest safeguard is a running "sources and uses" spreadsheet that ties back to your budget at every stage, so you always know where every dollar is coming from and going to.
The Bottom Line
A well-built capital stack is part art, part science, it's how professional developers reduce risk and attract funding. In Michigan, the strongest deals blend traditional lending with local incentive programs and real relationships with lenders and city officials.
If you're planning a development or major renovation in West Michigan, I can help you structure a capital stack that combines local funding tools, investor partnerships, and incentive programs into a deal that actually works. Because in this business, it's not just what you build, it's how you fund it.