What Is Mezzanine Finance in Australia? How It Works, Costs and Risks
Development Finance
Capital stack · Senior debt · Intercreditor deed · The exit
Mezzanine finance fills the space between what a senior lender will advance and the equity a developer actually has. This guide explains where it sits in the capital stack, how a typical Australian stack splits in numbers, what it costs including the fees the headline rate hides, the security and intercreditor deed behind it, how it compares with preferred equity and the other options, what is negotiable on a term sheet, who qualifies, and the risks.
Quick Answer
Mezzanine finance is a subordinated loan that sits between the senior construction facility and the developer's equity in a property project, secured behind the first mortgage and repaid after the senior lender when the project sells or refinances. In current Australian market ranges the strip commonly runs 10 to 20 percent of total development cost, taking combined debt to roughly 75 to 90 percent of cost at pricing in the mid-teens to low twenties percent per annum, indicative only. It exists to shrink the cash a developer has to contribute. When you are ready to fund a project, our development finance page covers the money side; read on for how the layer itself works.
| Question | The short answer |
|---|---|
| What it is | A subordinated loan that sits between the senior facility and the developer's equity in the capital stack |
| What it is for | Topping up senior debt so the developer contributes less cash to the project |
| Typical size of the strip | Commonly 10 to 20 percent of total development cost, taking combined debt to roughly 75 to 90 percent of cost and about 75 to 80 percent of end value; indicative market ranges |
| The security | A second registered mortgage behind the senior lender, usually with a general security agreement and guarantees |
| The key document | The intercreditor deed with the senior lender, setting priority, standstill and cure rights |
| What it costs | Commonly mid-teens to low twenties percent per annum with interest capitalised, plus establishment fees commonly 2 to 4 percent of the limit; indicative only, varies by lender and project |
| How it is repaid | From settlements or a refinance once the project completes, after the senior facility is cleared |
| Regulation | Business-purpose credit sits outside the National Credit Act; commercial loans carry the lowest borrower protection |
| Where the funding starts | Structured as part of a whole project facility; see how we fund developments |
What is mezzanine finance?
Mezzanine finance is a subordinated loan that fills the gap between senior debt and equity in a funding structure. The name is the architecture: a mezzanine is the floor between two floors, and mezzanine finance is the layer between the senior debt at the bottom of the risk order and the owner's equity at the top of it. In Australian property development, where the instrument does most of its work, it tops up the senior construction facility so the developer's cash contribution shrinks, in exchange for a price well above senior debt and a repayment position behind it.
One definitional fork is worth settling immediately, because the term means two related but different things. In corporate lending, the version most international definitions describe, mezzanine is a hybrid instrument: unsecured or lightly secured subordinated debt that often carries an equity kicker such as warrants or a conversion right, with interest sometimes paid in kind rather than in cash. In Australian property development, the version this guide covers, mezzanine is almost always straight subordinated debt secured by a second registered mortgage, with a fixed coupon and no equity conversion, although a minority of lenders add a profit participation. Same position in the stack, different legal machinery. If a definition you have read mentions warrants and yours mentions mortgages, both are right; they are describing different markets.
That position in the stack is the whole economics. The capital stack is the ranking of every dollar in a project by who gets repaid first. Senior debt sits first, secured by the first mortgage and repaid before anyone else. Mezzanine sits second, secured behind it. Preferred equity, where it exists, sits third, and the sponsor's own equity sits last, first to absorb any loss and last to be paid. Subordination is what the mezzanine lender is pricing: they recover only after the senior lender has been paid in full, so they charge for standing in that queue. The table sets the two debt layers side by side.
| Factor | Senior debt | Mezzanine finance |
|---|---|---|
| Priority on repayment | ✓ First, paid before everyone | Second, paid after the senior lender in full |
| Security | First registered mortgage | Second registered mortgage, with senior consent |
| Share of the funding | The majority of the debt, commonly 60 to 70 percent of total development cost | A top-up strip, commonly 10 to 20 percent of total development cost |
| Pricing | Lower, priced for first-ranking risk; single digits to around 11 percent per annum in current published ranges | Higher, priced for subordination; commonly mid-teens to low twenties percent per annum |
| Interest during the build | Usually capitalised or drawn down | Almost always capitalised to the facility |
| Who provides it | Banks and non-bank construction lenders | Private credit funds and specialist non-bank lenders |
Sizing runs off value and cost. A senior construction lender advances against the project's end value, its gross realisation value (GRV, also called gross development value or GDV), and against total development cost (TDC), and stops well short of either. Mezzanine extends the combined debt higher up both measures, which is why it is often described as equity gap funding: it replaces part of the cash the developer would otherwise have to find, without giving away ownership the way a straight equity partner would. How the layer behaves in a commercial property capital stack follows the same logic as a residential project, with the income of the asset doing some of the work the sales schedule does in a build.
How does mezzanine finance work in a property development?
In practice, mezzanine is arranged alongside the senior facility and drawn as the project needs it, then repaid at the exit. The sequence runs like this: the developer secures a site and a development approval, the senior lender sizes its facility against end value and total cost, and the shortfall between senior debt plus available equity and the full project cost becomes the mezzanine strip. The two facilities are documented together, the senior lender consents to the second mortgage, and an intercreditor deed fixes the order between the lenders before the first drawdown. Our property development finance guide walks the whole funding structure from site to settlement; this section follows just the mezzanine layer.
The proportions vary by project, but current Australian market ranges cluster tightly enough to put numbers on a typical stack.
| Layer | Share of total development cost | Indicative pricing | Security position |
|---|---|---|---|
| Senior debt | Commonly 60 to 70 percent of TDC | Commonly single digits to around 11 percent per annum | First registered mortgage |
| Mezzanine | Commonly 10 to 20 percent of TDC, taking combined debt to roughly 75 to 90 percent of cost and about 75 to 80 percent of end value | Commonly mid-teens to low twenties percent per annum, capitalised | Second registered mortgage, sometimes with share security |
| Preferred equity, where used | Commonly 5 to 10 percent of TDC | A preferred return plus, often, a profit share | No mortgage; unit or share security and control rights |
| Sponsor equity | Commonly 10 to 25 percent of TDC, with lenders wanting genuine cash or land equity of at least around 10 to 15 percent | The residual profit, and the first loss | Last claim on proceeds |
Every figure in that table is an indicative published market range, not a quote: individual lenders publish higher and lower, a strong sponsor prices below the band and a first project prices above it, and the whole grid moves with the cash rate and lender appetite. What does not move is the mechanics. Two of them distinguish the mezzanine layer during the build. First, the money is usually drawn progressively rather than in one advance, tracking the project's funding table. Second, the interest is almost never serviced monthly. A development site produces little or no income while it is being built, so mezzanine interest is capitalised, sometimes called rolled up interest: added to the loan balance and repaid with it at the end. That is also how the regulator describes the risk: development lending is negative cash flow lending, with interest paid from capital rather than income until the project completes.
The exit is the whole deal. Mezzanine is repaid from settlements as the completed stock sells, or from a refinance once the project is finished and revalued, and only after the senior facility has been cleared. Where sales run slower than the facility term, unsold stock is often refinanced with a residual stock loan, which in current published ranges commonly advances 60 to 70 percent of value at pricing well below mezzanine, repaying the construction debt and buying the developer time to sell. Combined gearing is usually expressed against total cost as a loan to cost ratio, and against end value as an LVR, and the mezzanine strip is sized inside both ceilings.
What does mezzanine finance cost in Australia?
Mezzanine pricing commonly lands mid-teens to low twenties percent per annum in current Australian development funding, indicative only as at July 2026, and the honest way to read the cost is blended: what senior plus mezzanine together do to the project's feasibility. Published mezzanine finance rates in Australia span wider than the central band, from around 12 percent for credentialed sponsors on strong projects to the mid twenties for first-time sponsors or higher-risk profiles. The rate on the mezzanine strip is only part of the picture. Because the strip is small relative to the senior facility, a high rate on a thin layer can still produce a workable blended cost, and because the interest is capitalised, the cost compounds quietly against the project's end value rather than showing up in a monthly payment. The components below are the ones a term sheet will price.
| Cost component | How it commonly works | What to watch |
|---|---|---|
| Interest rate | Commonly mid-teens to low twenties percent per annum, with published quotes from around 12 percent to the mid twenties; indicative, varies by lender, project and gearing | Priced off subordination, sponsor strength and presale cover |
| Capitalisation | Interest added to the balance monthly rather than serviced | The balance grows to completion, so time overruns compound the cost |
| Establishment fee | Commonly 2 to 4 percent of the facility limit, often capitalised too | Charged on the limit, not the drawn balance |
| Line or facility fee | An ongoing fee on the limit while the facility is open | Runs even when the strip is only partly drawn; worth negotiating a cap |
| Step-up rate | Commonly 2 to 4 percentage points per annum added if the project runs past its target completion date | Construction overruns are common; the step-up prices your delay risk |
| Minimum interest period | Commonly 9 to 12 months of interest guaranteed to the lender even on early repayment | A fast project still pays the minimum; the period is negotiable |
| Profit participation, some lenders | A kicker commonly of 2 to 5 percent of project profit where used, triggered above a margin threshold | The trigger threshold matters as much as the percentage |
| The blended cost | Senior plus mezzanine averaged across the whole debt stack | The number the feasibility actually has to wear |
| Legal and valuation costs | Borrower usually pays both lenders' documentation costs | The intercreditor deed adds legal work on both sides |
Those components stack. A facility quoted at a mid-teens headline rate can carry an all-in effective cost several points higher once the establishment fee, any line fee and any profit participation are counted, which is why the number to price is the blended feasibility cost, not the coupon. Time is the other quiet multiplier: on a $1 million strip at an indicative 18 percent per annum capitalised, six months of delay adds roughly $90,000 to the balance before any step-up rate is triggered.
From Switchboard's deal flow
Basis: recent broking quotes and lender term sheets seen in Switchboard deal flow, as at July 2026. Indicative only, never a quote or an offer.
- Senior construction debt commonly sits around 60 to 65 percent of end value in current non-bank term sheets; mezzanine typically tops combined debt up to roughly 75 to 80 percent of value, and higher against cost. It varies by lender, project and presale cover.
- Mezzanine pricing is where this commonly lands: mid-teens to low twenties percent per annum, interest usually capitalised to the facility rather than serviced monthly, with establishment and line fees on top. The blended cost of senior plus mezzanine is what the feasibility has to wear.
- Above mezzanine, preferred equity trades a fixed rate for a profit share and control rights, including step-in on default. That is a different bargain, not a cheaper one.
Indicative only, from broking experience as at July 2026, not a quote, an offer, a rate you will get or an approval likelihood. Every figure varies by lender, project, gearing, presale cover and market conditions. Pricing on a live deal is a term sheet conversation, not a table.
Whether the cost is worth paying is a feasibility question, not a rate question. Mezzanine makes sense when the profit released by starting now, at a higher combined LVR, beats the profit of waiting until the developer has more cash, and it stops making sense the moment the blended cost eats the margin the project was built on. A rough discipline seen across the market: projects showing profit on cost in the low twenties and above tend to carry mezzanine comfortably, projects under the high teens tend to find the layer eats the reason for doing the deal, and the band between is where the modelling earns its keep. If you want that arithmetic run against a real project, start with a conversation rather than a calculator.
What security does a mezzanine lender take?
Open the document pack on a mezzanine deal and four instruments do the work: a second registered mortgage, a general security agreement, guarantees, and the intercreditor deed that binds the two lenders together. The second mortgage over the project land is the core security, registered on title behind the senior lender's first mortgage. It cannot exist without permission: first mortgagee consent is a condition of registering a second mortgage, which means the senior lender effectively holds a veto over whether mezzanine can sit in the stack at all. This is also where the Australian structure parts ways with the American one: in the United States, real estate mezzanine is typically secured by a pledge of the ownership interests in the entity that holds the property, not by a mortgage on title, so if you are reading US material, the enforcement mechanics it describes do not map onto an Australian deal.
Around the mortgage sit the supporting layers. A general security agreement, a GSA, takes security over the borrowing company's other assets and is registered on the Personal Property Securities Register, the PPSR, so the mezzanine lender's interest is visible to anyone who searches the company. Personal or directors' guarantees from the sponsors reach past the project company to the people behind it; capped guarantees at the facility amount are the common market position, and an uncapped guarantee is worth pushing back on. Some structures add security over the shares in the development company, which gives the lender a path to take control of the company itself rather than just the land; where that share security is ever enforced, the change of control can trigger landholder duty in some states, and caveat procedures, where a caveat supplements the pack, run on state-based lapsing rules, which is one more reason the documents need a development-experienced solicitor rather than a generalist.
Then comes the document borrowers keep asking about and almost no lender page explains: the intercreditor deed, sometimes called a deed of priority. It is the contract between the senior and mezzanine lenders that fixes how the two coexist, and its terms matter to the developer even though the developer is barely a party to the bargain. The table below splits what it protects on each side.
| Party | Control or right | Why it matters to the developer |
|---|---|---|
| Senior lender | Absolute first-ranking priority over the project proceeds | The senior facility is repaid in full before the mezzanine lender or equity receives money |
| Senior lender | Standstill periods against mezzanine enforcement | The mezzanine lender may be blocked from acting while the senior lender decides how to respond to a default |
| Senior lender | Payment blocks during a senior default | Cash that would otherwise go to mezzanine can be frozen until the senior position is protected |
| Senior lender | Consent rights over the second mortgage and caps on further senior advances | The senior lender can decide whether mezzanine can exist behind them and how much priority debt can sit ahead |
| Senior lender | Control of enforcement and sale process | If the project fails, the senior lender usually controls the timetable and recovery path |
| Mezzanine lender | A registered second mortgage rather than an unsecured promise | The mezzanine lender gets a real title position, but only behind the first mortgage |
| Mezzanine lender | Cure rights and sometimes buy-out rights | The mezzanine lender may be able to fix a senior default, or buy out the senior debt, before enforcement progresses |
| Mezzanine lender | A defined ranking and share of proceeds | The deed sets what the mezzanine lender can recover after the senior lender has been cleared |
| Mezzanine lender | Information and consent rights over material project changes | Major changes to the build, budget, sales or facility can require lender consent, which can slow decisions |
| Mezzanine lender | Step-in mechanics after a mezzanine default | A default can shift practical control away from the developer and into the lender process |
For the developer, the practical reading is this: a default under either facility can put the whole project into the hands of the lenders' deed, and the timetable in that deed, who may act, and when, and who gets paid what, was negotiated between the lenders. Where the senior lender would rather not share the title at all, the alternative is often a single stretched facility instead of two layers; our note on stretched senior debt on a development site covers when that trade is available and what it costs.
How does mezzanine compare with preferred equity, stretch senior, a second mortgage and a caveat?
The short version: mezzanine is secured subordinated debt with a fixed rate, preferred equity is profit-share equity with control rights, stretch senior folds the whole strip into one higher-geared facility, and a second mortgage or a caveat does similar work outside a construction stack. Five instruments compete for the same job, closing the gap between senior debt and equity, and they are not interchangeable. They differ in legal form, in security, in how they price, and in what happens when something goes wrong. Scattered comparisons of these pairs exist across our shorter notes; this table is the one place they sit side by side.
| Instrument | Legal form and ranking | Typical security | How it prices | Where it fits |
|---|---|---|---|---|
| Mezzanine finance | Subordinated debt, behind senior, ahead of all equity | Second registered mortgage, GSA, guarantees, intercreditor deed | Fixed rate well above senior, commonly mid-teens to low twenties percent per annum, interest usually capitalised | Topping up a development or acquisition stack without giving up ownership |
| Preferred equity | Equity with a preferred return, behind all debt, ahead of sponsor equity | No registered mortgage in most structures; share or unit security and control rights | Preferred return plus, often, a profit share; step-in on default | Larger raises where debt ceilings are full; see preferred equity compared with mezzanine debt |
| Stretch senior | One senior facility written to a higher gearing, no second lender | First registered mortgage only | A single blended rate above vanilla senior, below mezzanine | When one lender will hold the whole strip; simpler documents, one relationship |
| Second mortgage | Debt secured behind an existing first mortgage on a completed property | Second registered mortgage with first mortgagee consent | Priced between senior debt and mezzanine, term-loan style | Releasing equity from property you already own; see our second mortgage guide |
| Caveat funding | Short-term debt noted on title by caveat, not a registered mortgage | A caveat over the property | Fast, short and expensive relative to term | Very short funding needs measured in weeks; see our caveat loans guide |
The line that trips people most is mezzanine versus preferred equity, because the two often raise a similar amount in a similar deal. The clean split is legal nature: mezzanine is debt with a mortgage and a fixed cost; preferred equity is equity with a return hurdle, usually a profit share, and control rights instead of security. A stretch senior facility removes the second lender entirely by writing one facility to a higher gearing, which simplifies the documents at a blended price. A straight second mortgage does mezzanine-like work on a completed property rather than a construction project, and a caveat is the short-fuse tool at the edge of the family. Most of these sit within the broader private lending market rather than with banks.
Who qualifies for mezzanine finance, and what gets deals declined?
Mezzanine lenders underwrite the project first and the sponsor a close second, and the criteria are more specific than most borrowers expect. The lender is being asked to hold the most exposed layer of debt in the deal, so they want the layers around them solid: a senior lender they can document with, a project that clears its numbers at the blended cost, and a sponsor who has delivered before. The table splits the file that gets funded from the file that does not.
| Underwriting factor | Fundable file | Decline risk |
|---|---|---|
| Development approval | A development approval is in place, not pending | No development approval, or one still in the application queue |
| Senior lender consent | The senior lender is open to consenting to the second mortgage and intercreditor deed | No realistic path to first mortgagee consent |
| Sponsor equity | Genuine sponsor cash or arm's-length land equity sits behind the ask | Thin genuine sponsor equity, or reliance on paper uplift only |
| Feasibility | The feasibility still works after the blended senior plus mezzanine cost | The feasibility only works if end values, build costs and sales timing all land perfectly |
| Presales | Presales satisfy the senior lender's cover condition | Presale cover falls short of what the senior facility requires |
| Builder | A fixed-price building contract is signed with a builder who checks out | The builder is unresolved, undercapitalised, untested or not fixed-price |
| Sponsor experience | The sponsors have delivered comparable projects before | First-time delivery risk is being pushed onto the most expensive layer of debt |
The market puts rough numbers on most of those lines, all indicative and all lender-specific. Genuine sponsor equity commonly needs to reach at least around 10 to 15 percent of total development cost, in cash or arm's-length land equity, before a mezzanine lender treats the gap as risk shared rather than risk shifted. Presale cover on apartment projects commonly runs 60 to 100 percent of the senior debt, lighter or waived on townhouse and land projects. Lenders commonly re-run the feasibility on their own conservative end values and costs and want to see profit on cost in the high teens to low twenties after that haircut, so a sponsor's 25 percent margin can read as 19 in the lender's model. A construction contingency of at least around 5 percent of build cost is the common minimum, with experienced sponsors carrying more. And project size has a floor: small strips are hard to place because the legal and valuation costs do not shrink with the loan, and many mezzanine lenders prefer projects of several million dollars of total development cost and up.
The decline list is drawn from broking experience rather than lender marketing, and where this commonly lands is unglamorous: deals rarely die on the rate, they die on consent, cover and the builder. A developer who cannot get the senior lender to the intercreditor table has no mezzanine deal regardless of the project's margin, and a project whose equity gap exists because the sponsor has no cash at all, rather than cash committed elsewhere, reads as risk shifted rather than risk shared.
What can you negotiate on a mezzanine term sheet?
More of a mezzanine term sheet is negotiable than first-time borrowers assume, and the wins compound because they repeat across every project. Term sheets arrive looking standard. The rate is usually the least movable line on the page; the terms around the rate are where a prepared borrower, or their broker, earns the money back. Seven items come up on almost every deal, with the common market positions shown as indicative ranges as at July 2026.
- The step-up rate. Commonly 2 to 4 percentage points per annum added once the project runs past its target date. Push for a longer initial period, a softer step, or both; delays are the single most common way a mezzanine facility ends up costing more than modelled.
- The minimum interest period. Commonly 12 months of interest guaranteed to the lender even on early repayment; 9 months is often achievable. On a project that settles fast, that difference is real money for one line of negotiation.
- Establishment fee staging. The common ask is the full 2 to 4 percent at drawdown. Deferring part of it to settlement, or making it payable from proceeds, improves the project's working capital at no change to the headline cost.
- Line fees on the undrawn balance. Punitive on staged drawdowns. Where the lender insists, negotiate a fixed cap rather than a percentage that runs on money not yet borrowed.
- The guarantee cap. A directors' guarantee capped at the facility amount is the common market position; an uncapped guarantee gives the lender a claim beyond the loan and should be resisted as a default setting, not accepted as one.
- Cross-default carve-outs. Multi-project sponsors should confine cross-default to this project's borrowing company and its senior facility, so a wobble on an unrelated project cannot detonate this one.
- Consent thresholds and any profit participation trigger. Blanket consent rights over variations slow a build; materiality thresholds are the fix. And where a profit kicker exists, the trigger margin is as negotiable as the percentage: a kicker that starts several points higher up the profit scale may simply never bite.
None of this list is exotic, and all of it is indicative: individual lenders hold firm on different lines. The pattern worth internalising is that a mezzanine lender prices the facility as a package, so a borrower who concedes the rate conversation quickly often has room on everything else. This is also, candidly, where a broker who sees mezzanine term sheets every month earns a place in the deal.
What are the risks of mezzanine finance for the developer?
Mezzanine is leverage on leverage, so the fair way to frame the risk is not "is it dangerous" but "what exactly does it amplify". Used inside a sound feasibility it converts a stalled project into a running one. Used to paper over missing equity it magnifies every problem the project already had. These are the six risks that do the damage, with the numbers that make them concrete.
- Compounding cost against a fixed end value. Capitalised interest grows the debt every month while the project's end value does not move. On a $1 million strip at an indicative 18 percent, six months of delay adds roughly $90,000 before any step-up rate; every month is repriced at the most expensive rate in the stack.
- Construction and sales risk landing on the dearest layer. Cost overruns and slow sales are absorbed by equity first, but they squeeze the mezzanine exit before they ever threaten the senior facility. Our note on development funding equity tiers in FY27 maps how thin the buffer can get at the top of the stack.
- Settlement risk on the exit. The facility's repayment assumes presales settle. Settlement defaults commonly run 5 to 10 percent of contracts even in normal markets, and higher where prices have moved against purchasers between exchange and completion. A settlement shortfall pushes the exit into a residual stock refinance, commonly 60 to 70 percent of value in published ranges, cheaper than mezzanine but not instant to arrange.
- Personal guarantees that outlive the project company. A directors' guarantee reaches past the special purpose vehicle to the people behind it, so a shortfall on the project can follow the sponsors home. It is also usually the lender's fastest enforcement path, faster than realising the land.
- The lenders' deed runs the default. Standstill, cure rights, payment blocks and step-in mechanics in the intercreditor deed were negotiated between the lenders. In a default, the timetable is theirs, not the developer's.
- Gearing with no buffer. Combined debt near the top of the LVR range means a small fall in end value, or a valuation shortfall at refinance, can leave the stack owing more than the exit produces. The common discipline is to stress the feasibility at 5 and 10 percent below expected end value: a stack that cannot repay both facilities at minus 5 percent is carrying more mezzanine than the project can afford.
None of this argues against the instrument; it argues for using it on projects whose margin can carry it. A developer who prices the delay case, not just the base case, and who reads the intercreditor deed before signing rather than after defaulting, is using mezzanine the way it is designed to be used.
How is mezzanine finance regulated in Australia?
Read the regulator's own documents and the picture is consistent: mezzanine lending to developers is commercial credit, lightly protected on the borrower side, inside a private credit market the regulator is watching closely on the fund side. Business-purpose lending sits outside the National Consumer Credit Protection Act 2009: ASIC's guidance on whether the credit legislation applies puts the test at a predominant purpose, more than half consumer, and states plainly that loans to companies are not caught, which covers almost every development vehicle. Lenders typically document the position with a business purposes declaration, which is generally relied on unless the lender had reason to believe the funds were really for personal use. The narrow exception runs the other way: a loan to a natural person to buy or build residential property as an investment can still be regulated, which is one reason development borrowing is done through companies.
On the protection side, ASIC's guidance on disputes about commercial loans is blunt: the law provides the lowest level of protection to commercial loans, lenders who write only commercial loans need not hold a credit licence or belong to AFCA, and what remains are the ASIC Act's prohibitions on unconscionable and misleading conduct and unfair contract terms. For a mezzanine borrower the practical consequence is that the loan documents and the intercreditor deed are the protection, which is why specialist legal review is not optional. Wholesale investors funding these loans sit under a separate disclosure regime again, which is a fund question rather than a borrower one.
The market context explains the regulator's attention, and the numbers are worth seeing together.
What the RBA's easing note means for a developer is simple and double-edged: mezzanine and stretched facilities are more available than they were, on softer presale and collateral terms, while the subordination risk that ASIC keeps pointing at has not changed at all. More available money at the top of the stack is a reason to sharpen the feasibility, not to relax it.
Can mezzanine finance be used outside property development?
Property is where Australian mezzanine does most of its volume, but the instrument is older and broader than the capital stack of a townhouse project. In business lending, mezzanine sits between a senior facility and the owner's equity to fund acquisitions, management buyouts and growth capital: the same subordination, priced the same way, but leaning on the company's cash flow and enterprise value rather than a registered mortgage over land. This is the arena where the international, hybrid definition lives: corporate mezzanine more often carries an equity kicker such as warrants or a conversion right, and interest that can be paid in kind, accruing rather than paid in cash, which is why definitions written for that market read so differently from an Australian development term sheet. It suits an established business with reliable earnings that wants to fund a step change, buying a competitor, a premises or a large contract ramp-up, without selling ordinary equity to do it.
The eligibility logic transfers almost unchanged: a business case that survives the blended cost of debt, genuine owner skin in the deal, and a believable exit, here refinance out of trading cash flow rather than a sales schedule. One further practical point sits with the accountant rather than the lender: for a company borrowing for business purposes, mezzanine interest, including capitalised interest, is generally deductible against assessable income, and interest is an input-taxed financial supply so no GST applies to it, but the timing of deductions and the treatment of fees depend on the structure, so the tax answer belongs to specific advice, not a guide. For most owners the practical starting point is simpler than the label: map what the business needs against the whole menu on our business loans page, and if you are working through funding stages more broadly, the business owners finance hub and the government's guidance on applying for a business loan are both worth the read before any subordinated layer enters the conversation.
Mezzanine finance is the subordinated layer of a project's capital stack: a loan that sits behind senior debt and ahead of all equity, secured by a second registered mortgage with the senior lender's consent, commonly sized at 10 to 20 percent of total development cost and priced mid-teens to low twenties percent per annum with interest capitalised to the exit, every figure indicative. It exists to shrink the cash a developer contributes, it is governed between the lenders by an intercreditor deed, and it is commercial credit with the lowest level of borrower protection, inside a private credit market the regulators are watching on the fund side. Used on a project whose margin can carry the blended cost, it starts projects that would otherwise wait; used to replace equity that was never there, it amplifies everything that goes wrong. The funding conversation itself starts with development finance for your project.
Key takeaway: mezzanine is bought with three things, a consenting senior lender, a feasibility that survives the blended cost, and an exit you would bet the guarantees on. Price the delay case before you sign.What sources support this guide?
This guide is written from broking development and private credit deals, and every regulatory and market figure is drawn from a primary source, read and confirmed on 8 July 2026. The gearing, pricing, fee and eligibility ranges labelled as published market ranges are drawn from a survey of publicly available Australian development lending materials conducted on 8 July 2026, cross-checked against Switchboard's own deal flow, and are indicative only; individual lenders publish outside every band. The decline patterns and negotiation positions are Switchboard's own broking experience, labelled as such rather than dressed up as statistics. The sources below are the ones the regulatory and market-size claims rest on.
- ASIC, Report 814, Australia's evolving capital markets (September 2025), for the private credit market estimate of around $200 billion, roughly half real estate focused, and the description of development lending as negative cash flow lending with a 36 to 60 month lifecycle.
- ASIC, Report 820, private credit surveillance report (November 2025), for the 28-fund review, its combined assets and its observations on property development lending practices.
- Reserve Bank of Australia, Financial Stability Review, resilience chapter (March 2026), for the non-bank share of financial system assets and the noted easing in non-bank lending standards for property developers.
- APRA, quarterly ADI property exposures statistics, December 2025 (published March 2026), for banks' commercial property exposures.
- ASIC, does the credit legislation apply and disputes about commercial loans, for the predominant purpose test, the business purposes declaration, the company exclusion and the level of protection on commercial loans.
- Australian Government, National Consumer Credit Protection Act 2009, the legislation the business-purpose boundary sits in, and business.gov.au on applying for a business loan for general business finance guidance.
Frequently Asked Questions
Mezzanine finance is a subordinated loan that sits between senior debt and the owner's equity in a funding structure. In Australian property development it tops up the senior construction facility, is usually secured by a second registered mortgage, prices well above senior debt, and is repaid after the senior lender when the project sells or refinances. In corporate lending the term often describes a hybrid instrument with an equity kicker such as warrants; the Australian property version is almost always straight secured debt. The name comes from its position in the capital stack: above equity, below senior debt.
It is added behind the senior construction facility to close the gap between what the senior lender will advance and the total project cost, so the developer contributes less cash. In current Australian market ranges the mezzanine strip commonly runs 10 to 20 percent of total development cost, taking combined debt to roughly 75 to 90 percent of cost. Interest is usually capitalised to the facility, sometimes called rolled up interest, because a project under construction produces little or no income. The facility is repaid at the exit, from settlements as the completed stock sells or from a refinance, after the senior facility has been cleared. Our development finance guide covers the full structure.
Mezzanine pricing commonly lands mid-teens to low twenties percent per annum in current Australian development funding, with published market quotes running from around 12 percent for strong sponsors to the mid twenties for higher-risk profiles. Establishment fees commonly run 2 to 4 percent of the facility limit, often capitalised, with line fees and sometimes a profit participation on top, so the all-in effective cost can sit several points above the headline coupon. That is indicative only, as at July 2026, and it varies by lender, project, gearing and presale cover. Interest is usually capitalised rather than serviced monthly, so the real test is whether the project feasibility can absorb the blended cost of senior plus mezzanine debt to completion. If you want the arithmetic run on a real project, check your eligibility and we will walk it through.
In current Australian market ranges the mezzanine strip commonly runs 10 to 20 percent of total development cost, taking combined senior plus mezzanine debt to roughly 75 to 90 percent of cost and around 75 to 80 percent of end value, with some published offers running higher against cost. Those are indicative ceilings as at July 2026: the actual number on any project is set by the senior lender's consent, the presale cover, the sponsor's genuine equity, commonly a minimum of around 10 to 15 percent of total development cost, and the feasibility surviving the blended cost.
Typically a second registered mortgage over the project land behind the senior lender's first mortgage, a general security agreement over the borrowing company registered on the PPSR, and personal or directors' guarantees from the sponsors. The senior lender's consent is needed for the second mortgage, and an intercreditor deed between the two lenders fixes who ranks where. Some structures add share security over the development company, which differs from the United States, where real estate mezzanine is typically secured by a pledge of ownership interests in the entity rather than a mortgage on title.
An intercreditor deed, sometimes called a deed of priority, is the agreement between the senior and mezzanine lenders that sets who ranks first, how much each may recover, and what the mezzanine lender can do on a default, including standstill periods, cure rights and payment blocks. The senior lender requires it because it locks in their priority and controls what happens if the project gets into trouble; without their consent, a mezzanine lender cannot register behind them at all.
Mezzanine is debt: a subordinated loan with a fixed rate, usually secured by a second registered mortgage, repaid before any equity. Preferred equity is equity: no registered mortgage in most structures, a preferred return that often comes with a profit share, ranking behind all debt but ahead of the sponsor's own equity, and usually control rights such as step-in on default. They occupy a similar wedge in the capital stack but differ in legal nature, cost shape, security and exit; our note on preferred equity versus mezzanine compares them line by line.
No. In Australian property development, mezzanine finance is often secured by a second registered mortgage, but it is not the same as a standalone second mortgage on a completed property. Mezzanine is part of a development capital stack, needs senior lender consent, is governed by an intercreditor deed, and is repaid from project settlements or refinance after the senior lender is cleared. A standalone second mortgage is usually a separate equity-release or term-loan structure against property that already exists.
At an indicative 18 percent per annum capitalised monthly, $1 million of mezzanine finance accrues about $196,000 over 12 months, about $307,000 over 18 months, and about $347,000 over 20 months before fees. Establishment fees, line fees, legal costs, valuation costs, step-ups and any profit participation can increase the all-in cost. These figures are illustrative only, not a quote, offer or approval indication.
Yes. Mezzanine loans also fund business acquisitions, management buyouts and growth capital, sitting between a senior facility and the owner's equity and priced for the subordinated risk. Corporate mezzanine more often carries the hybrid features the international definition describes: unsecured or lightly secured debt with an equity kicker such as warrants or conversion rights, and interest that can be paid in kind. It suits established businesses with reliable earnings that want to grow without giving up ordinary equity. Our business loans page maps where it sits among the alternatives.
Developers with a development approval in place, a feasibility that still works at the blended cost of senior plus mezzanine debt, commonly a high-teens to low-twenties profit on cost on the lender's own conservative re-run, genuine sponsor equity commonly of at least 10 to 15 percent of total development cost, presale cover that satisfies the senior lender, commonly 60 to 100 percent debt cover on apartment projects, a fixed-price building contract with a credible builder, a construction contingency of at least around 5 percent of build cost, and a senior lender willing to consent to the second mortgage. Delivery experience on comparable projects carries real weight and is commonly the single biggest driver of pricing.
Mostly not under consumer credit law. Business-purpose lending sits outside the National Credit Act, and loans to companies are not caught at all, so mezzanine finance for a development company is commercial credit, which ASIC says carries the lowest level of legal protection for borrowers. Lenders typically document this with a business purposes declaration, which is generally relied on unless the lender had reason to believe the funds were for personal use. ASIC has also been reviewing private credit funds, including development lenders, but that is supervision of the funds rather than protection for borrowers, so the loan documents and intercreditor terms carry the weight.
Generally yes for a development company borrowing for business purposes: interest, including capitalised interest, is ordinarily deductible against the project's assessable revenue, and interest itself is an input-taxed financial supply, so no GST applies to it. The timing of deductions, the treatment of establishment fees as borrowing costs, and whether the project is held as trading stock or on capital account all change the position, so specific advice from an accountant experienced in property development is essential before relying on any of this.
The main risks are capitalised interest compounding against a fixed end value, construction cost and sales risk landing on the most expensive layer of debt, presale settlement defaults, which commonly run 5 to 10 percent even in normal markets, personal guarantees that reach past the project company, the senior and mezzanine lenders' default and step-in rights under the intercreditor deed, and combined gearing that leaves little buffer if costs rise or presales fall over. A common discipline is to stress the feasibility at 5 and 10 percent below expected end value; if the stack cannot repay both facilities at minus 5 percent, the mezzanine layer is carrying more risk than it should. Mezzanine sharpens the return on a project that performs and sharpens the loss on one that does not; our read on equity tiers in FY27 shows how thin the top of the stack can run.
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