Mezzanine Finance for Property Development in Australia

Australian property developers running tight feasibilities in 2025–26 increasingly find the senior facility cuts out 8–12% of total development cost (TDC) short of what the project actually needs. Major banks have pulled back, non-bank senior lenders have tightened loan-to-cost ratios (LTC), and equity is expensive — most developers don’t have another 10% of TDC sitting idle for one project. That gap is where mezzanine finance lives.

This guide is written for the developer who has a senior term sheet in hand, knows the project still doesn’t fund, and is weighing a mezzanine tranche against finding more equity or shrinking the deal. It walks through how mezzanine actually sits in the stack, what the pricing is in the current Australian market, the security structures lenders use, the math behind mezz-versus-equity, the term-sheet items developers commonly miss, and the post-Australian Securities and Investments Commission (ASIC) Report 820 (REP 820) environment for private credit. Expect numerical claims to be hedged — mezzanine pricing moves with cash rate, project risk and sponsor profile, and rates published in May 2026 will look different in twelve months.

What mezzanine finance is, from a developer’s perspective

Mezzanine finance — often shortened to “mezz” — is a layer of subordinated debt that sits below the senior development facility and above the developer’s equity in the capital stack. The mezzanine lender accepts a junior security position (typically a second-ranking mortgage or a charge over the special-purpose vehicle’s (SPV) shares) and prices the loan accordingly. Mezz is generally repaid only after the senior facility is fully discharged at project completion, which is usually funded by settlement proceeds from sales or by a refinance into a residual stock loan.

The most useful way to think about mezzanine is not as a “loan” but as substitute equity priced as debt. The mezzanine lender is taking equity-like risk — second behind a senior on a project that is negative cash flow until completion — but is structured as a creditor with contractual interest and a hard maturity. That structural difference is what makes mezz commercially viable. It gives the developer leverage on top of leverage without diluting profit share, and it gives the lender a fixed return without the equity holder’s open-ended downside protection rights. Australian non-bank lenders MFEG describe the position in the capital stack in similar terms: behind senior on claims, ahead of equity on cashflow.

There is one definitional trap worth flagging early. Several Australian lenders use “mezzanine finance” and “second mortgage” interchangeably, while others draw a sharp distinction. The cleanest working definition is that a mezzanine loan is any subordinated funding layer behind a senior facility on a development project — whether secured by registered second mortgage, by a share charge over the SPV, by a caveat, or by an unsecured guarantee. The security mechanism is a separate question to whether the loan is “mezzanine”.

Where mezzanine sits in the capital stack

A typical Australian development capital stack in 2026 looks something like this, expressed as proportions of total development cost:

This is a generalised structure. Specific projects vary materially: a small two-townhouse project in a non-major capital city might run 70% senior / 0% mezz / 30% equity, while a $40M apartment project with strong presales might run 65% senior / 20% mezz / 15% equity. Pricing within each layer also varies with sponsor track record, project type and asset class — a credentialed developer doing a tenth project in an established suburb may price mezz at 13% p.a., while a first-time sponsor doing a regional development may struggle to find mezz below 22% p.a.

The Reserve Bank of Australia (RBA) cash rate and bank funding costs flow into senior pricing, which in turn drags mezz pricing. As senior margin tightens, mezz margins also compress; as it widens, mezz widens. Recent Australian commentary places typical mezz pricing in the 15–22% range, though the tail extends to 25–28% for high-risk profiles.

Within the mezzanine layer itself there is further structure. A single project may have one mezzanine tranche or two (sometimes called “junior mezz” and “senior mezz”); occasionally there is a preferred equity tranche between mezz and ordinary equity. The preferred equity layer is structurally similar to mezzanine but is treated as equity rather than debt for accounting purposes and typically does not have a fixed maturity. For most Australian small-to-mid developers, the practical capital stack remains senior / one mezz tranche / equity.

For the broader treatment of how each layer fits together, the construction finance guide covers the senior debt side in depth, and the private lenders guide covers the non-bank senior segment now writing most Australian development debt.

How mezzanine is priced

Mezzanine pricing has three components that developers should always model separately, because they hit the feasibility at different points.

Coupon interest. The headline rate, typically expressed as percent per annum and applied to the outstanding balance. Australian mezzanine coupons in 2026 typically sit in the 14–20% per annum range, with weaker projects pushing 22–24% per annum. Interest is generally capitalised — added to the balance monthly rather than paid in cash — because development projects do not produce income until settlement.

Fees. Establishment fees of 2–4% of the facility limit are typical, sometimes structured as a “line fee” charged on the committed amount whether drawn or not. Some lenders charge an additional exit or completion fee at repayment. Legal and valuation costs are passed through. On a $3M mezzanine facility, fees can easily total $150,000–$250,000 over the life of the facility, which is material on an after-tax basis.

Equity participation. Some mezzanine lenders take an “equity kicker” — a contractual right to a share of project profit on top of the coupon. This may be structured as warrants, a profit share clause, a put option to convert debt to equity, or a graduated rate that steps up if profit exceeds a threshold. Equity kickers commonly add 2–5% of project profit, though they can run higher on smaller projects with weaker sponsor profiles.

A mezzanine facility quoted at “16% p.a.” may carry a true effective cost of 19–22% per annum once fees and equity participation are layered in. Developers running feasibilities should model the all-in cost, not the coupon — and stress it. Feasly’s feasibility platform is built around this exact use case: layered capital stack modelling, with sensitivity analysis across mezz coupon, equity kicker triggers and time-to-completion, and stamp duty calculated across all eight Australian states and territories at acquisition.

For a deeper treatment of how sensitivity analysis is run across a capital stack, see the sensitivity analysis guide.

The decision framework: mezz versus more equity

This is the question that lender marketing pages rarely address head-on. A developer with a senior shortfall has three choices: bring in more equity, take a mezzanine tranche, or shrink the deal. The first two are usually the live options, and the choice between them is mathematical, not philosophical.

Set up the comparison. Take a hypothetical $20M TDC project with a $24M gross realisable value (GRV), a 24-month development period, and a senior bank willing to advance 65% of TDC at 8% per annum. That leaves a $7M shortfall against TDC. The developer has $4M of equity available. The choice is to find another $3M of equity (a joint venture, a passive money partner, or self-funding) or to take a $3M mezzanine tranche.

Scenario A — additional equity. The developer brings in a 50:50 money partner for the $3M. Project equity becomes $7M ($4M sponsor + $3M partner). Project profit at completion (after senior interest, marketing, GST, selling costs) is approximately $3.8M. The developer’s share is $1.9M, generating a return on equity (ROE) of roughly 48% over the two-year project, or annualised internal rate of return (IRR) of approximately 21%.

Scenario B — mezzanine tranche. The developer takes a $3M mezzanine facility at 17% per annum coupon plus 3% establishment fee plus 2.5% equity kicker on profit above 18% margin. Project profit before mezz costs is the same $3.8M; mezz interest capitalised over 24 months is approximately $1.1M, fees $90,000, equity kicker $80,000, leaving $2.5M for the developer. Sponsor ROE on the $4M original equity is roughly 63%, or annualised IRR of approximately 28%.

The mezzanine path delivers a higher ROE per dollar of sponsor equity in this scenario, but it carries different risks. If the project’s GRV slips 5% (a common stress case), the mezzanine scenario’s profit drops sharply while the equity scenario’s profit drops less in absolute terms — the equity partner shares the downside, while the mezzanine lender does not. The mezzanine lender gets paid first regardless of project outcome.

The mezz-versus-equity framework is therefore typically understood as a trade-off between expected return and downside protection. Higher leverage (more mezz) increases expected ROE but compresses the project’s break-even GRV. Developers running tight margins or operating in volatile sub-markets often prefer the equity path despite the lower headline ROE because the project survives a wider range of outcomes.

A practical rule of thumb that holds across most Australian projects: if the project’s profit-on-cost (POC) is above 22% with a buffer for cost overruns, mezzanine tends to be the more attractive option for an experienced sponsor with adequate equity buffer elsewhere. Below 18% POC, mezzanine often becomes uneconomic because the cost of the mezz erodes the developer’s residual claim too significantly. Between 18% and 22% POC, the right answer is project-specific.

For a fuller treatment of the equity side — including preferred equity, which is a separate but adjacent capital stack layer — see the equity partners and preferred equity guide.

Security and structuring

The mezzanine lender’s exit on default is the developer’s primary risk. Understanding the security structure is therefore the most important single piece of due diligence on the term sheet.

Second-ranking mortgage

The most common Australian structure. The mezzanine lender registers a second mortgage on the project land or property title behind the senior lender’s first mortgage. In default, the senior lender has primary rights to enforce; the mezzanine lender’s mortgage gives them standing to lodge proceedings, to be notified of the senior lender’s enforcement actions, and to claim any surplus after the senior is paid out.

The practical limitation is that the mezzanine lender cannot enforce without the senior lender’s consent (and typically without buying out the senior facility), because doing so would prejudice the senior’s position. This is codified in a deed of priority (sometimes called a priority deed or intercreditor deed) between the two lenders. The Personal Property Securities Register (PPSR) outlines how priority generally operates between security interests.

Share charge over the special-purpose vehicle (SPV)

An alternative or supplementary structure. The mezzanine lender takes a charge over the shares in the SPV company that owns the development. In default, the lender can step in by enforcing the share charge — effectively taking control of the SPV — without needing to enforce against the land directly. This avoids the deed-of-priority friction with the senior but introduces new mechanics: the lender must operate the SPV, which means honouring the senior facility’s covenants and bringing the project home. In practice, this structure is more common where the senior facility prohibits second mortgages, or where the mezzanine lender is positioning to take an equity-like role on default.

Caveat

A caveat is a notice on title rather than a security interest in itself; it preserves the caveator’s claimed equitable interest by preventing further dealings. Some Australian mezzanine lenders use caveats either as the sole security mechanism (uncommon and weaker) or as a supplementary protection layered on a mortgage or share charge. Caveats can be removed by lapsing notices, so the lender must respond to challenges within the statutory window. Caveats over development land are a topic in their own right, with the caveat regime largely set by state legislation — for example NSW under the Real Property Act 1900 sections 74F and following.

Personal guarantees

Almost universal on Australian mezzanine facilities. The directors of the SPV provide personal guarantees, typically capped at the loan amount but sometimes uncapped. Spousal guarantees may be required where the spouse holds assets. The personal guarantee is often the lender’s de facto first-line enforcement mechanism because pursuing a director with personal assets is faster than enforcing on land.

The deed of priority

This is the critical document that governs how the senior and mezzanine lenders interact. Typical terms include:

• The senior lender’s facility limit (which the mezzanine lender wants to cap, to prevent the senior from “tacking” further advances ahead of the mezz)
• Standstill provisions — periods during which the mezzanine lender cannot take enforcement action even if their loan is in default
• Cure rights — the mezzanine lender’s right to cure a default under the senior facility to prevent the senior from enforcing
• Buy-out rights — the mezzanine lender’s right to purchase the senior facility (paying out the senior to step into the first-ranking position)
• Notification obligations — both lenders must notify each other of defaults, enforcement actions and material changes

From the developer’s perspective, the deed of priority is largely a lender-to-lender document, but its terms have practical consequences. A short standstill period combined with a generous senior facility cap exposes the developer to the risk that the senior lender can fund-up substantially ahead of the mezz, eroding the mezz’s security and triggering the mezz lender to demand additional collateral.

What a mezzanine lender typically requires

Eligibility criteria for Australian mezzanine finance in 2026 typically include:

Project metrics. Minimum project size of roughly $2–3M total development cost for small projects, with most mezzanine lenders preferring $5M+. Minimum profit on TDC of approximately 18–22% on the lender’s own feasibility (lenders typically re-run the feasibility with conservative GRV and cost assumptions, so the developer’s 25% POC may show as 19% in the lender’s model). Senior facility already approved or at term sheet stage — mezz lenders rarely lead the capital stack.

Sponsor track record. Demonstrated experience completing similar projects in similar markets is the single biggest factor in mezzanine pricing. A first-time developer can access mezz, but at the higher end of the rate range and usually with stronger personal guarantees. Second-project and third-project sponsors typically achieve materially better terms; established sponsors with 10+ projects often run their own private credit relationships and negotiate from a position of strength.

Presales. For residential apartment projects, presales are usually required by the senior lender (typically 60–100% debt cover from presales contracts). The mezzanine lender will typically require presales at or near senior requirements, with similar terms (qualifying purchasers, 10% deposit, no related-party sales above a low threshold). For townhouse and house-and-land projects, presales requirements are lighter or sometimes waived entirely.

Exit clarity. The mezzanine lender wants to see a clear and credible exit — typically sale of stock or refinance into a residual stock facility at completion. A project with strong unconditional presales has a self-evident exit; a project with weak presales relying on completion-stage sales is materially riskier.

Cost contingency. Most mezzanine lenders require an explicit construction contingency line in the feasibility — typically 5% of construction cost. Lenders may also require a separate “interest contingency” buffer to absorb extended construction periods.

Equity contribution. Most mezzanine lenders will not fund the equity layer entirely — the developer must contribute genuine equity (cash or land equity) of typically 10–15% of TDC minimum. Land equity contribution is generally accepted where the land was acquired at arm’s length and is independently valued.

Negotiating the term sheet — what most developers miss

Mezzanine term sheets are typically presented as standard, take-it-or-leave-it documents. In practice, more is negotiable than the average first-time mezzanine borrower realises. The points most worth pushing on:

Rate ratchet and step-up clauses. Many term sheets include a “step-up” rate if the project extends past a target completion date, with the rate jumping by 2–4% per annum after the deadline. Construction overruns are common; a 6-month delay on a $3M facility at a 3% step-up costs $45,000. Negotiate either a longer initial period or a softer step-up.

Equity kicker triggers. Where an equity kicker is included, the trigger threshold is highly negotiable. A kicker triggered at 18% POC will hit on most successful projects; the same kicker triggered at 25% POC may never trigger. Pushing the trigger up by 3–5 percentage points is often achievable.

Establishment fee staging. Some lenders take the full establishment fee at drawdown. Negotiating to defer half to repayment, or to make the fee payable from settlement proceeds, materially improves the project’s working capital position.

Line fee on undrawn. Avoid line fees on undrawn portions of the facility wherever possible — they are punitive on projects with staged drawdowns. If the lender insists, cap the line fee at a fixed amount rather than a percentage.

Personal guarantee cap. Push back on uncapped personal guarantees. A capped guarantee at the facility amount is standard market and should be the default; uncapped guarantees give the lender a claim well beyond the loan exposure.

Cross-default carve-outs. Mezzanine facilities typically include cross-default provisions with the developer’s other facilities. For multi-project developers, negotiate that the cross-default applies only to this project’s SPV and senior facility, not to other unrelated projects.

Reporting and consent obligations. Standard term sheets require lender consent for variations to the construction contract, marketing strategy and key contractors. Excessive consent rights slow the project. Negotiate materiality thresholds — typically consent required for variations above 5% of contract value or above $100,000.

Pre-payment penalty. Most mezzanine facilities have a minimum interest period — the lender guarantees themselves at least 12 months of interest even if the loan is repaid in month three. This is reasonable, but the term length is negotiable. A minimum interest period of 9 months is achievable on most facilities and saves materially on projects that move faster than expected.

A capital-stack-aware feasibility model can be used to test how each of these negotiated terms moves the project’s profit on TDC and the sponsor’s ROE — small term sheet wins compound across a multi-project portfolio.

Market context — banks, non-banks and ASIC

The mezzanine market in Australia in 2026 looks materially different to five years ago. Major banks have continued their retreat from speculative residential development. Industry commentary, including from Wingate Group, reports a structural shift toward non-bank lenders carrying the development finance load.

The non-bank universe has grown rapidly. ASIC’s Report 820 on private credit, published in November 2025, estimates the Australian private credit market at approximately $200 billion, with around half of that exposure in real-estate-related lending. This is a distinguishing feature of the Australian market relative to international peers — private credit elsewhere skews to corporate leveraged lending; in Australia, real estate dominates. ASIC’s earlier Report 814, published in September 2025, sets out the broader market structure.

Australian Prudential Regulation Authority (APRA) has separately announced changes to the prudential framework for banks, including a new top-tier “Most Significant Financial Institutions” category covering the major banks and Macquarie. None of this directly regulates non-bank mezzanine lenders, but it shapes the senior debt market that mezzanine sits behind.

ASIC’s REP 820 also identifies four areas where private credit fund managers (which include many of the active mezzanine lenders) need to improve disclosure and conduct: conflicts of interest, fees and remuneration, portfolio transparency and valuation, and terminology. The Australian Institute of Company Directors (AICD) summary of REP 820 flags board-level implications.

For developers, the practical takeaway is that the regulatory environment is tightening for fund managers, not for borrowers. Mezzanine remains available, but expect lenders to be more deliberate about documentation, more transparent about fees (which is good for borrowers), and more conservative on borderline projects. Asking the mezzanine lender directly how they handle conflicts of interest between their fund’s investors and their borrowers is now a reasonable due-diligence question.

Mezzanine and the regulatory perimeter

Mezzanine facilities to property developers are almost always unregulated by the National Consumer Credit Protection Act 2009 (NCCP). The NCCP applies to credit provided wholly or predominantly for personal, domestic or household purposes, or for residential property investment by an individual. Property development loans are typically business purpose loans to corporate entities, which falls outside the NCCP perimeter.

The mechanical implication is that the standard responsible-lending obligations, hardship provisions and dispute resolution requirements that apply to consumer mortgages do not apply to development mezzanine. The developer is treated as a sophisticated commercial counterparty. The lender will typically require a business purposes declaration confirming this — and per ASIC guidance on the credit perimeter, the declaration is conclusive unless the lender knew or had reason to believe the funds were for personal use.

The PPSA framework discussed above governs the priority of any non-real-property security interests (such as charges over goods, plant or contract rights). Real-property mortgages are governed by each state and territory’s Real Property Act / Land Title Act regime. The Personal Property Securities Act 2009 sets out priority rules for personal property collateral.

State-by-state considerations

Mezzanine finance itself is a national market — the same handful of large non-bank lenders operate across all jurisdictions, and pricing does not vary materially by state. State-by-state variation arises in three specific areas:

Mortgage registration. Second mortgages are registered through the state land titles office. Registration fees vary slightly between New South Wales (NSW), Victoria (VIC), Queensland (QLD), Western Australia (WA), South Australia (SA), Tasmania (TAS), the Australian Capital Territory (ACT) and the Northern Territory (NT), but the substantive process is similar. Registration triggers nominal mortgage duty in some jurisdictions; this is generally absorbed in legal costs.

Caveats. Where mezzanine lenders use caveats as supplementary security, the lapsing notice process and timing differs slightly between states. In NSW, a lapsing notice can be served by an affected party giving the caveator 21 days to commence proceedings to support the caveat; in Victoria, similar provisions operate under the Transfer of Land Act 1958. Developers should verify with their lawyer what response window applies in their jurisdiction.

SPV company structure and stamp duty. Where mezzanine is structured as a share charge over the project SPV rather than a real-property mortgage, any change of control on enforcement may trigger landholder duty in some states. Landholder duty thresholds and rates differ: NSW and VIC apply landholder duty above $2M of landholdings; QLD, WA and other states have their own thresholds. Mezzanine lenders structuring share charges typically draft enforcement provisions to manage landholder duty exposure, but developers should have their tax adviser review this on each transaction.

Off-the-plan presales. Presales requirements that mezzanine lenders impose are often shaped by the state-specific contract law and disclosure regime for off-the-plan sales — NSW under the Conveyancing Act 1919 and the relevant amendments; Victoria under the Sale of Land Act 1962; QLD under the Land Sales Act and the Property Occupations Act.

Beyond these specific points, mezzanine remains a substantially national market.

Tax treatment of mezzanine finance

Mezzanine interest expense on a property development loan is generally tax-deductible to the borrowing SPV under section 8-1 of the Income Tax Assessment Act 1997, provided the borrowed funds are used for income-producing or business purposes. For property development, this generally means the development project will be sold or will produce assessable income on completion, in which case interest expense is deductible against project revenue.

Two complications worth flagging:

Timing. Interest on a property development loan is generally deductible in the year it is incurred — not when paid. For capitalised mezzanine interest (where interest accrues to the loan balance rather than being paid in cash), the timing of the deduction broadly follows the accounting treatment of the loan. Developers operating on an accruals basis will typically claim the deduction as it accrues. The Australian Taxation Office (ATO) interest expenses guidance sets out the general principles.

Trading stock vs capital account. Most property developers hold project stock as trading stock under section 70-10 of the Income Tax Assessment Act 1997. This means project revenue is on revenue account, project costs (including interest) are deductible against revenue, and there is no capital gains tax (CGT) discount available. Where a project is held on capital account — typically for build-to-hold or build-to-rent strategies — different rules apply, and interest deductibility may be partially restricted under the Thin Capitalisation rules where related-party debt is involved. The Thin Capitalisation regime was significantly amended by the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share — Integrity and Transparency) Act 2024, and may affect larger developers with offshore parents.

Goods and services tax (GST). Mezzanine interest is generally treated as a financial supply and is input-taxed under GSTR 2002/2 — i.e., the lender does not charge GST on interest, and the borrower cannot claim input tax credits on the interest expense. Fees may be treated differently depending on the nature of the fee. The GST Margin Scheme handles the development output side of the GST treatment separately.

Tax treatment is highly fact-specific and developers should obtain specific advice on each transaction. The general framework above is a starting reference, not a substitute for tax counsel.

Risk profile — what can go wrong

Mezzanine finance amplifies returns when the project performs and amplifies losses when it doesn’t. The specific risks to model:

Cost overruns. A 10% construction cost overrun on a $14M build is $1.4M. If the senior facility is fully drawn and the mezzanine is at limit, the overrun must come from sponsor equity or a top-up. Top-ups on existing mezzanine facilities are available from some lenders but typically priced 2–3% per annum above the original coupon. A construction contingency line of 5% of build cost is the minimum prudent buffer; many experienced developers hold 7–10%.

Time overruns. Mezzanine interest is capitalised — every additional month adds to the balance. A six-month construction delay on a $3M mezz facility at 17% per annum coupon costs approximately $260,000 in additional interest, plus potentially triggering step-up rates and extension fees. Time risk should be modelled with a 3-month and 6-month delay scenario.

Settlement risk. Off-the-plan presales settle when the project completes. Settlement default rates of 5–10% are typical even in normal markets; rates of 15–20% have been seen in markets where prices have moved against purchasers. The mezzanine facility’s exit assumes settlements complete; significant settlement defaults can trigger an extended hold period and the need for a residual stock facility to refinance the mezz. The property development finance guide covers residual stock refinancing options.

Market risk. GRV slippage between term sheet and completion is the largest single risk on most projects. A 5% reduction in GRV on a $24M project is $1.2M directly off the bottom line — and the mezz lender gets paid first, so it is the equity holder who absorbs the GRV loss. Modelling at minus 5% and minus 10% GRV is standard practice and the project should be capable of repaying both senior and mezz at minus 5%.

Refinance risk. If the project completes but sales are slower than projected, the developer may need to refinance the senior and mezz into a longer-dated residual stock facility. Residual stock pricing is typically materially cheaper than mezz (60–70% of GRV at 9–12% per annum), but it requires lender appetite and may take 2–3 months to arrange. Holding cash buffer to bridge the refinance gap is prudent.

Cross-default and intercreditor risk. A default on the senior facility triggers the mezz lender’s rights under the deed of priority. The mezzanine lender can often accelerate, demand cure or, in extremis, enforce. Sponsor reputation across multiple projects can be impacted by a single project’s default.

Personal guarantee enforcement. The director’s personal guarantee is the lender’s most accessible enforcement mechanism. A project default with a personal guarantee in place can result in the director’s personal assets being pursued. This is the single biggest reason to negotiate guarantees to be capped at the facility amount and to ensure the project itself is the primary source of repayment.

When to use mezzanine — and when not to

Mezzanine is typically a useful tool when:

The project has a robust profit margin (>20% POC on the lender’s own conservative feasibility) with a clear exit path. The sponsor has adequate equity buffer outside the project to absorb cost overruns and time delays. The senior facility is tight enough that an additional 10–15% leverage materially improves the project’s IRR. The project size justifies the fixed costs of mezzanine (legal, valuation, fees) — typically $5M+ TDC, although smaller projects can sometimes access mezzanine at higher all-in pricing.

Mezzanine is generally a poor choice when:

The project margin is marginal (under 18% POC) — the cost of mezzanine erodes the project’s residual claim beyond a reasonable risk-adjusted return. The sponsor has no equity buffer outside the project — a single cost overrun can force the project into default. The senior facility already provides adequate leverage and the sponsor is reaching for higher returns rather than addressing a genuine funding gap. The project’s exit relies on a market view that is materially more aggressive than the lender’s own assumptions — in this case, the lender will price the additional risk in, and the all-in cost may make the project uneconomic.

There is also a structural reason developers sometimes avoid mezz even where the math works: mezzanine introduces an additional senior decision-maker into the capital stack. Material variations, marketing strategy changes and contractor decisions may require mezz lender consent. For developers who value operational autonomy, additional equity (where available on acceptable terms) can be preferable.

Mezzanine in your feasibility model

A well-built feasibility model treats mezzanine finance as a distinct funding layer with its own draw schedule, interest rate, fee structure and repayment waterfall. The minimum modelling elements:

• Separate draw schedule for senior and mezzanine, with mezz typically drawing after senior is fully drawn or in proportion through construction
• Monthly interest accrual on both facilities at their respective rates, with interest capitalised to balance
• Fee schedule with establishment fees treated as upfront costs (deductible as borrowing costs over the loan term or immediately, depending on facility length and ATO rules) and exit fees treated as payable at facility termination
• Repayment waterfall — senior paid in full first from settlement proceeds, then mezz, then equity distributions
• Equity kicker calculation tied to profit on TDC or sponsor IRR, with the trigger threshold and percentage clearly specified

A feasibility model that handles these capital stack mechanics cleanly — testing how the project performs under different mezzanine pricing scenarios, different equity kicker triggers, and different settlement timing assumptions — separates the developers who price mezzanine on instinct from those who price it on evidence.

For the broader feasibility framework, see the property development feasibility guide.

Conclusion

Mezzanine finance is one of the most useful — and most misunderstood — instruments in the Australian property developer’s toolkit. Used well, it is substitute equity priced as debt: a way to access higher project leverage without diluting profit share, in a market where bank senior facilities frequently cut out 10–15% of TDC short of what the project needs. Used poorly, it is a way to layer expensive leverage onto a marginal project and amplify a loss the sponsor could have avoided by walking away.

The developer’s job is to know the math, to negotiate the term sheet, and to model the project at the lender’s conservative assumptions rather than the sponsor’s optimistic ones. The 2025–26 environment — bank retreat, non-bank ascendancy, ASIC’s tightening focus on private credit fund managers — has not changed the underlying instrument, but it has shifted the negotiating dynamics. Developers who treat mezzanine as a transactional commodity will be priced at the lender’s standard rate card; developers who treat it as a strategic capital stack decision, tested in their feasibility model and negotiated point by point, typically achieve materially better outcomes.

The next time a senior bank says no, or says yes at a level that leaves the project under-funded, mezzanine is the layer that fills the gap. Whether to use it, and on what terms, is the question this guide is designed to help answer.