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Mezzanine Finance

Mezzanine Finance is a subordinated funding layer that sits behind senior debt in the capital stack. In property development, mezzanine finance fills the gap between what the senior lender will provide and the total project cost — reducing the amount of cash equity the developer needs to contribute. It carries higher risk (and higher cost) than senior debt because the mezzanine lender is repaid after the senior lender.

Why It Matters

Most senior lenders will fund 55–65% of a project's Gross Realisation Value (GRV). That leaves a significant equity gap. Mezzanine finance allows developers to reduce their cash contribution — sometimes to as little as 10–15% of total project cost — by layering in an additional funding source. It is a standard part of the capital stack in Australian townhouse and small-lot development.

How It Works

  • Senior debt is secured as first mortgage and funds the majority of the project.
  • Mezzanine finance is layered behind senior debt, often secured by a second mortgage or equitable charge.
  • The combined LTC (senior + mezzanine) typically reaches 80–90% of total project cost.
  • Mezzanine is repaid after senior debt from sell-down proceeds or refinance.

Common Use Cases

  • Townhouse development where senior debt does not cover the full project cost
  • Equity gap funding for developers who want to preserve cash
  • Layered structures in commercial property acquisition
  • Developers scaling from one project to multiple concurrent builds

Related Switchboard Resources

Is mezzanine finance more expensive than senior debt?
Yes — mezzanine rates are typically higher because the mezzanine lender sits behind the senior lender in repayment priority. Rates vary but are commonly 15–25% p.a. in Australian development finance.
Can I use mezzanine finance on a small townhouse project?
Yes — mezzanine is commonly used on 3–10 lot townhouse projects where the developer needs to reduce their cash equity contribution. See Townhouse Development Finance.
How is mezzanine finance repaid?
Mezzanine is typically repaid from sell-down proceeds or refinance after the senior debt is cleared. The exit strategy is critical to the mezzanine lender's approval.