Quick answer
Mezzanine debt is borrowed money that ranks below the main (senior) loan but above the owners' equity. If the asset is sold or the business fails, the senior lender is repaid first, the mezzanine lender second, and the owners last. In Australia it's mostly used to fill funding gaps in property development and business acquisitions, and it costs more than senior debt because the lender stands further back in the queue.
Key points
- Ranks second: behind senior debt, ahead of shareholders and owners
- Usually secured by a second mortgage, a pledge over shares or a second-ranking GSA
- Interest is commonly capitalised and paid in one hit at the end
- Supplied mostly by private credit funds and specialist lenders rather than the major banks
Mezzanine debt is a loan that stands second in line for repayment. It’s still a debt, owed back in full with interest, but it ranks behind the senior debt and ahead of the people who own the project or company. The name comes from architecture: a mezzanine floor sits between two main levels, and this layer of funding sits between the senior lender and the owners’ own money.
Why anyone borrows it
Senior lenders cap how much of a project they’ll fund. A construction lender might stop well short of total cost, and a bank financing a business purchase will usually want the buyer to contribute a meaningful slice. When the owner’s cash plus the senior loan still leaves a gap, there are three ways to close it: find more equity, bring in an investor who takes a share of the profit, or borrow a second-ranking layer. Mezzanine debt is the third option. It costs more than the senior loan, but the owner keeps control and the upside.
How it’s usually structured in Australia
- Security in second place. Over land, typically a second mortgage. For a company purchase, often a pledge over the shares in the buying entity or a second-ranking general security agreement.
- A deed between the lenders. The senior and mezzanine lenders sign a priority and subordination deed that fixes who is paid when and what each can do on default.
- Interest rolled up. Repayments during construction are rare. The interest is usually capitalised and cleared at the end from sales or a refinance.
- Sometimes a profit share. Some mezzanine lenders ask for an extra fee or a slice of profit on top of interest.
A payout example: good sale and bad sale
A developer builds twelve townhouses in Perth’s northern suburbs. By the end of the project the senior lender is owed $5.6m including interest, the mezzanine lender is owed $2.0m including its capitalised interest, and the developer put in $1.2m of land equity and cash.
| Net sale proceeds | Senior lender receives | Mezzanine lender receives | Developer receives |
|---|---|---|---|
| $9.5m (sells as planned) | $5.6m, paid in full | $2.0m, paid in full | $1.9m (a $0.7m gain) |
| $7.0m (market softens) | $5.6m, paid in full | $1.4m, short by $0.6m | Nothing |
The second row is the whole story of mezzanine risk. A drop in sale prices wipes out the developer’s equity first, then cuts straight into the mezzanine lender’s position, while the senior lender is untouched. That’s why mezzanine pricing sits well above senior pricing, and why mezzanine lenders look hard at pre-sales, budgets and contingencies before committing.
Working on a project where the senior loan stops short? Talk to us about the funding gap.
Why regulators are paying attention
Much of this lending happens in private credit funds rather than banks. In September 2025 ASIC published REP 814, an independent review of Australia’s private credit sector, which recommended that funds disclose how much of their portfolio sits in mezzanine debt and equity, alongside clearer reporting on valuations and fees. For borrowers, the practical takeaway is to understand who your mezzanine lender is, where its money comes from and how it behaves when a project runs late.
Mezzanine debt compared with neighbouring terms
- Senior debt: first-ranking, cheapest, paid before everything else.
- Second mortgage: a security position; mezzanine debt over property often uses one, but a second mortgage can also be a stand-alone business loan.
- Preferred equity: ranks below all debt and is ownership, not a loan.
Our mezzanine finance page covers intercreditor terms and lender assessment in depth, and construction and development finance explains the senior side.
Short on the final slice of funding?
Most mezzanine conversations start with one number: the shortfall left once the senior loan and your own contribution are counted. Give us that figure, the security involved and your timeline. The enquiry takes roughly a minute, and making it places nothing on your credit report. Your proposal isn’t shopped to a long list of funders; someone experienced reviews it and calls you directly. Accurate costs and existing loan figures let us match the structure properly from the outset.
Frequently asked questions
What does 'mezzanine' mean in finance?
It borrows the architectural term for a half-floor between two main levels. In a funding structure, mezzanine debt sits between the senior loan above it in priority and the owners' equity below it.
Is mezzanine debt secured?
Usually, but in second place. Over property it's often a second-ranking mortgage. In a company acquisition it may be a pledge over the shares of the holding company or a general security agreement that ranks behind the senior lender's.
Why is mezzanine debt more expensive than a bank loan?
Because the mezzanine lender only gets paid after the senior lender is repaid in full. If the project or business underperforms, the mezzanine lender is the first lender to lose money, so it prices that risk into its fees and margin.
Is mezzanine debt the same as subordinated debt?
Mezzanine debt is a type of subordinated debt. The term usually implies a structured layer designed into a funding package, often with capitalised interest and sometimes a share of profits.
Do the major banks provide mezzanine debt?
Rarely. Banks generally prefer to be the senior lender. Mezzanine layers in Australia mostly come from private credit funds, non-bank lenders and private investors.