What mezzanine finance is
Mezzanine finance is a subordinated loan that ranks behind senior debt and ahead of the developer's equity. It funds part of the gap between the senior facility and total development cost, lifting overall leverage. Because it takes second position, it costs more than senior debt — but far less than giving up a share of the project.
When it's the right structure
Mezzanine is the tool of choice when senior debt leaves an equity gap the developer would rather not fill entirely in cash — to preserve capital, run more projects concurrently, or improve return on equity. It is sized to the slice where the cost is justified by the value of the equity it releases.
| Position in stack | Between senior debt and equity |
|---|---|
| Security | Second mortgage / subordinated, behind senior |
| Effect | Raises total leverage; reduces cash equity required |
| Cost | Higher than senior; lower than equity dilution |
| Repaid by | Sales settlements, behind the senior facility |
Worked example
The same reference deal runs across all our capital-stack pages: a 24-apartment project with an $18.0m end value and a $12.5m cost base (land, build, consultants and contingency, before finance). Here is how it looks funded with senior debt plus a mezzanine layer — the mezzanine fills the gap above senior so less equity is tied up, lifting return on equity.
| Layer | Amount | % of cost |
|---|---|---|
| Senior debt @ 8.50% | $8.13m | 60% |
| Mezzanine @ 16.00% | $1.63m | 12% |
| Developer equity | $3.79m | 28% |
| Total development cost | $13.55m | 100% |
| End value (GRV) | $18.00m |
|---|---|
| Loan to value (LVR) | 54.2% |
| Loan to cost (LTC) | 72.0% |
| Blended cost of debt | 9.75% |
| Finance cost (interest) | $951,116 |
| Brokerage — BluCow (indic.) | $97,550 + GST |
| Development profit | $4.09m |
| Margin on cost | 30.2% |
| Return on equity | 107.8% |
| Equity multiple | 2.08x |
Illustrative only — a single $18.0m reference deal is used across our capital-stack pages so you can compare structures like-for-like. Actual figures depend on the lender, valuation, QS report and the deal.
Advantages and limitations
Advantages: preserves developer cash, boosts return on equity, and is cheaper than surrendering a share of profit. Limitations: higher cost than senior, requires the project margin to support it, and needs an intercreditor arrangement with the senior lender.
Related services
Frequently asked questions
How does mezzanine finance work in a development?
It's a subordinated loan behind senior debt and ahead of equity. It funds part of the gap between senior debt and total cost, raising leverage and reducing the cash equity required — at a higher cost than senior.
Is it more expensive than senior debt?
Yes, because it ranks behind senior for repayment and takes subordinated security. It's used on the slice of funding where the cost is outweighed by the return on preserved equity.