Mezzanine finance is expensive — that is the starting point for any honest conversation about this product. The question isn't whether the cost is high; it's whether the return on your equity justifies it. For a developer with a strong site, a viable feasibility and insufficient equity to satisfy senior lender requirements, the answer can be yes. For a developer chasing yield on a marginal project, it almost certainly isn't.
Where Mezzanine Fits in the Capital Stack
Senior debt — typically sourced from a major bank or a tier-one non-bank lender — will generally fund to 60–65% of Total Development Cost (TDC) on a residential or mixed-use project. Some lenders reference Gross Realisation Value (GRV) as the ceiling instead, which can produce a different outcome depending on your margin assumptions, but the practical effect is similar: there is a significant gap between what the senior lender will provide and what the project actually costs to deliver.
That gap is where mezzanine sits. A mezzanine facility layers above the senior debt in the capital stack, taking the total debt exposure up to 75–80% of TDC — sometimes slightly higher on strong projects with deep presale coverage. Your equity covers the remaining 20–25%. The mezzanine lender holds a second registered mortgage and, critically, a subordination deed with the senior lender that governs how each party's position is managed if the project runs into trouble.
Intercreditor dynamics
The intercreditor agreement between senior and mezzanine lenders is not a formality. It determines cure rights, standstill periods and the sequence of enforcement — all of which directly affect how much room you have to manage a project through difficulty. Senior lenders generally have the right to call in the subordinate position if defaults occur, and mezzanine lenders typically have a limited window to step in and remedy a senior default before enforcement proceeds. These mechanics matter when you are structuring a deal, not when you are already in one.
The Real Cost of Mezzanine
Rates on mezzanine facilities in Australia typically run from 15% to 25% per annum, all-in. Some private credit funds price above that for smaller deals or sponsors without an established track record. You will also encounter establishment fees of 1–2% and exit fees of similar magnitude, meaning the effective cost of a 12-month facility at 18% with a 1.5% establishment fee and 1% exit is closer to 20.5% annualised. That is a meaningful drag on project returns.
The arithmetic is straightforward: if your project's equity IRR sits at 22% without this layer, and you introduce a facility at an all-in cost of 20%, you are borrowing at a rate close to your return threshold. The benefit is the freed-up equity — you can redeploy it to another site or simply reduce the absolute capital at risk. But the margin for error essentially disappears. A cost overrun of 5%, a presale rescission rate above expectations, or a six-month programme delay can turn a marginal gain into a loss once subordinate interest compounds.
When the numbers work
The rule of thumb we apply is that your project IRR — modelled conservatively, not optimistically — needs to comfortably exceed the all-in rate by a margin that absorbs realistic downside scenarios. On a project with a genuine IRR of 30%+ and strong presale coverage, this structure can be a rational capital efficiency tool. On a project already running at 18% IRR before financing costs, it is not.
Time is the other variable. The cost accrues per annum, which means programme delays are doubly punishing — the facility keeps capitalising while your sales programme stalls. Realistic construction and settlement timelines are a direct input into whether the structure is viable, not a formality in the feasibility.
What Mezzanine Lenders Require
These lenders are not passive capital providers. They conduct their own due diligence — often more forensic than the senior lender — because their position is subordinate and they need to be confident both in the project and in your ability to deliver it.
Presales
Presale coverage is typically the first filter. Most funds require sufficient unconditional presales to cover 100% of the senior debt facility, sometimes more. The quality of those presales matters as much as the quantum — contracts on small deposits with extended sunset clauses are viewed differently to contracts exchanged at market rates with 10% deposits.
Quantity surveyor and feasibility
An independent QS report and a detailed feasibility model are non-negotiable. The feasibility needs to demonstrate an adequate margin — typically 20%+ on cost or 15%+ on GRV — and needs to hold under reasonable stress scenarios. If your feasibility is built on optimistic sales rates or construction costs that haven't been tested by a builder's tender, expect to revise it before any lender engages seriously.
Sponsor track record
First-time developers find mezzanine finance difficult to access regardless of project quality. Funds want evidence that you have delivered comparable projects — on programme, on budget, without litigation. Where track record is limited, the structure may still work with the right co-sponsor or development manager arrangement, but that needs to be built into the deal from the outset.
How We Approach the Capital Stack
At Black Mountain Financial, we structure development transactions from the ground up — which means we are looking at the full capital stack before approaching any lender, not retrofitting a mezzanine layer after the senior deal is done. George Popadalis works with developers across Canberra, the ACT and nationally to model the funding structure that genuinely fits the project, rather than the one that happens to be available.
That process starts with an institutional-grade feasibility model. We stress-test your construction cost assumptions, your sales rate, your programme timeline and your GRV against current comparable evidence. Only once we have a clear picture of the project's economics do we approach lenders — and with more than 50 lender relationships across major banks, non-bank lenders and specialist private credit funds, we are not working with a limited panel. We know which funds are actively writing tickets in the current market, what their pricing looks like and what deal characteristics they favour.
Structuring a senior plus mezzanine finance transaction also means managing the intercreditor negotiation — making sure the terms between the two lenders are workable before you are committed. That detail matters at settlement and potentially more at enforcement, and it gets resolved at heads of terms, not after. Where this product is not the right answer, we will tell you. Preferred equity, joint venture structures or simply phasing the project to reduce peak equity requirements can achieve similar outcomes without the interest rate burden.
Is It the Right Tool for Your Project?
This structure works when three conditions are present simultaneously: the project has genuine margin headroom above the all-in cost of debt, the equity freed up by the facility can be productively deployed elsewhere, and the sponsor has the track record and project control to deliver on programme. When all three apply, the structure makes sense.
It does not work when the project's returns are already compressed, when construction risk is high and not adequately contracted, or when the freed equity has nowhere specific to go. In those circumstances, the cost erodes returns without a corresponding benefit — and the subordinate position means that if the project encounters difficulty, you are managing two lender relationships under pressure rather than one.
Mezzanine finance is a tool for strong projects, not a rescue mechanism for weak ones. If you need it because your equity is insufficient and your project IRR is marginal, the answer is usually to renegotiate the site, bring in a capital partner or wait for a better project — not to layer in expensive subordinate debt and hope the market cooperates.
If you are working through a development funding structure and want to understand whether the numbers actually work, our development finance advisory process starts with the feasibility, not the product. You can also use our development funding calculator to model your capital stack before we speak.