Mezzanine finance: closing the gap between senior debt and your equity

Picture a development budget as a building with floors. The ground floor is the developer’s own cash. The top floors belong to the senior lender, who has first claim on everything. Mezzanine finance is the middle level: borrowed money that ranks behind the senior loan but in front of the owner’s equity. It exists because senior lenders cap how much they’ll lend, and very few projects or acquisitions can be funded from the owner’s pocket for the rest.

This page explains how that middle layer is put together in Australia, what the paperwork between lenders actually does, and how to judge whether the extra cost buys you anything worth having.

Where does mezzanine sit in the capital stack?

Every large funding package has a pecking order. If the project is sold or the business is wound up, money flows down the stack in a fixed sequence:

Layer	Who provides it	Paid back	Risk and price
Senior debt	Bank, non-bank or private credit fund	First	Lowest risk, lowest cost
Mezzanine debt	Private credit fund, specialist lender, private investors	After senior is cleared	Higher risk, noticeably dearer
Preferred equity (sometimes)	Investors who want a fixed return	After all debt	Higher again
Ordinary equity	You, your partners	Last, keeps whatever is left	Takes the first loss, keeps the upside

Mezzanine is still debt, which is the key point. You owe it back with interest regardless of how the project performs, and you don’t hand over ownership. That separates it from bringing in an equity partner, who would share in the profit indefinitely. Our debt vs equity funding comparison covers that wider choice.

Where Australian businesses actually use it

Property development. This is by far the most common home for mezzanine debt here. A senior construction lender agrees to fund a set share of the project cost. The developer has land equity and some cash, but there’s still a gap. A mezzanine loan, usually secured by a second mortgage over the site, plugs it. See construction and development finance for how the senior layer is assessed.

Buying a business. A purchaser might have bank funding for part of the price and a vendor willing to carry some of it, and still be short. A second-ranking loan secured over the target’s assets or the shares in the purchasing company can make up the difference. Our page on business acquisition loans covers the senior side of these deals, and vendor finance is often used alongside or instead of mezzanine.

Management buyouts and growth projects. Established companies sometimes use a subordinated layer to fund a large expansion without diluting existing shareholders.

The intercreditor deed: the document that decides everything

Two lenders sharing security over the same asset need rules. Those rules are written into an intercreditor deed (lawyers also call it a priority and subordination deed), signed by both lenders and usually the borrower. Lawyers who act on these deals describe two jobs it does:

• Priority. The senior lender ranks first regardless of whose security was registered when.
• Subordination. The mezzanine lender generally can’t demand or accept repayment of principal while any senior debt remains owing.

What gets negotiated in the detail matters to you as the borrower:

• Permitted payments. Senior lenders often allow interest or fees to flow to the mezzanine lender only while there’s no default. During construction they may block payments entirely, which is why mezzanine interest is so often capitalised and settled at the end.
• Consent rights. The mezzanine lender commonly wants a say before the senior loan’s terms are changed, such as a facility increase or a looser repayment schedule. That can slow you down if you need to renegotiate mid-project.
• Standstill and buy-out. If things go wrong, the mezzanine lender may have to wait a set period before enforcing, and often has a right to buy out the senior debt to take control.

One practical warning: in some states a second mortgage can be registered over land without the first mortgagee’s consent. That doesn’t make it a good idea. Almost every senior facility agreement treats unapproved further borrowing as a default. Get the senior lender’s written consent first, every time.

What mezzanine lenders look at

What they assess	Why it matters to a second-ranking lender
Total debt against cost or completed value	They lend on top of the senior loan, so they measure combined debt, often as a loan to cost ratio or a share of end value
Your equity at risk	Real cash or land equity ahead of them is their buffer; little or no equity is a common reason for decline
Track record	Completed projects or a history running similar businesses
Pre-sales or contracted income	Evidence the exit will actually produce enough money to clear both loans
The senior lender and its terms	Who sits above them, how tight the senior covenants are, and what the intercreditor deed will say
Budget and contingency	Overruns hit equity first, then the mezzanine position
Guarantees	Director or developer guarantees, sometimes including cost-to-complete guarantees

If you’re unsure whether your structure is even workable, ask us to look at it. A one-minute enquiry puts your numbers in front of a specialist, and asking leaves no mark on your credit history.

What does mezzanine finance cost?

It’s dearer than senior debt by design, because the lender is accepting a higher chance of losing money. Expect several layers of cost:

• an establishment fee, often charged on the full facility limit;
• interest, frequently capitalised (added to the balance each month and paid at exit), which means it compounds;
• line or commitment fees on undrawn amounts;
• legal costs for both the mezzanine documents and the intercreditor deed;
• sometimes an exit fee or a share of the project profit instead of, or as well as, some of the interest.

This directory doesn’t publish rates. Ask each lender for the total dollar cost to exit under your expected timeline, and again under a timeline six months longer, because developments and integrations rarely finish early. Run both through our loan cost comparison calculator.

Fee transparency is worth pressing on. In its September 2025 review of the private credit sector, which ASIC sized at about $200 billion, the regulator flagged opaque fee structures and valuation practices as areas the industry needed to improve. That doesn’t single out any lender, but it’s a reason to ask for every fee in writing, including any paid to related parties.

A worked example: six townhouses

An illustration only, with round numbers.

A developer plans six townhouses with a total project cost of $4.2m, including land, construction, fees and a contingency. The senior construction lender will fund $2.9m. The developer owns the land outright and counts $900k of land value as equity.

• Total cost: $4.2m
• Senior debt: $2.9m
• Developer equity: $900k
• Gap: $400k

A mezzanine lender agrees to $400k, secured by a second mortgage and governed by an intercreditor deed with the senior lender. Interest is capitalised. Four of the six townhouses are pre-sold.

On completion, settlement proceeds go first to the senior lender until it’s paid in full, then to the mezzanine lender (principal, capitalised interest and fees), and only then to the developer. If sales come in lower than forecast or late, the developer’s profit absorbs the hit first. The mezzanine lender is protected unless the shortfall eats through the whole equity layer.

The question for the developer isn’t “is mezzanine expensive?” It is: does the profit left after mezzanine costs beat the alternatives, such as bringing in a joint-venture partner who would take a share of the whole profit, or shrinking the project?

Pros and cons

Advantages

• Lets a project or purchase proceed without giving away ownership
• Often interest-only or capitalised, so cash isn’t drained during construction
• Can be structured to match a specific exit
• Faster to arrange than raising equity from multiple investors

Drawbacks

• Costs considerably more than senior debt
• Two sets of lenders, two sets of conditions and an intercreditor deed add legal cost and time
• Capitalised interest compounds, so delays get expensive quickly
• Guarantees can put personal assets on the line
• The mezzanine lender’s consent rights can limit your flexibility later

Alternatives worth weighing

• More equity. A joint-venture partner or investors. Cheaper in a bad outcome, dearer in a good one.
• A bigger senior loan. Some non-bank and private lenders offer “stretch senior” loans that cover more of the cost in a single facility, avoiding a second layer.
• A second mortgage over other property. If you own equity in a different property, borrowing against it can be simpler than layering debt over the project site.
• Vendor terms. On land purchases or business acquisitions, deferring part of the price with the seller can replace some or all of the mezzanine.
• Fewer stages. Building in stages can shrink the funding gap to something your equity covers.

Lenders in our directory that work in this space include Qualitas, Metrics Credit Partners and Merricks Capital. Check each one’s current offering before you approach it.

Short of the full amount? Let’s map your stack

Mezzanine finance is rarely the only answer. Plenty of the deals we look at turn out to be better served by a single larger facility, a second mortgage over a different property or a short bridging loan while a sale settles. Working out which one fits starts with seeing the numbers.

Our enquiry takes roughly a minute, and making it leaves your credit report exactly as it was. It goes to one team, not a long list of funders who will each ring you. Someone experienced studies your project or purchase, then calls you directly. Be exact about the cost, the senior offer you hold (if any) and your equity, and we can point you at a realistic structure on the first call.

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