Mezzanine finance to close the funding gap

What is mezzanine finance?

Mezzanine finance is a middle layer of funding. Picture a project funded in three slices: the senior lender at the bottom, the borrower’s own equity at the top and mezzanine in between. The senior lender is repaid first, the mezzanine funder second, and the equity holder last. Because the mezzanine slice carries more risk than senior debt, it is generally priced and structured differently.

The aim is simple: reduce the cash the borrower has to find. A developer who would otherwise need a large equity contribution can use mezzanine to cover part of that gap, which frees capital for other projects or makes a deal possible at all.

Who uses mezzanine finance?

• Property developers whose senior loan leaves an equity gap
• Investors buying a property where the bank will not fund enough
• Business buyers short of the deposit on an acquisition
• Owners completing a project that has run over budget
• Syndicates and joint ventures topping up funding
• Borrowers who want to keep their own cash for another opportunity

How does mezzanine sit alongside senior debt?

Layer	Who provides it	Priority if things go wrong	Typical features
Senior debt	Bank or specialist lender	Repaid first	Largest portion, lowest risk
Mezzanine	Private or specialist funder	Repaid second	Higher-risk, shorter term
Equity	Borrower or partners	Repaid last	Absorbs first losses

The senior lender must usually agree to the structure. An intercreditor agreement sets out who can do what if the borrower struggles. That is why the conversation with the senior lender comes early.

What do mezzanine funders look at?

The project or deal. Budget, timeline, approvals, location and end value. They need confidence the project can stand even if costs or sales are slower than hoped.

The exit. How and when they are repaid. Typically that is sale proceeds or a refinance at completion. A weak exit is the quickest route to a decline.

The borrower. Experience, finances, other commitments and how much of their own money is going in. Lenders want the borrower to have skin in the game.

The senior terms. Loan size, covenants, restrictions and the senior lender’s attitude to second-layer funding.

Security. A second-ranking mortgage where allowed, or a charge over the borrowing entity or shares. Our second mortgage and third mortgage pages explain the property-based versions.

How does Ownright approach mezzanine deals?

We begin with the question of whether mezzanine is the right tool. Sometimes a simple second mortgage, a joint venture partner or a slightly different senior loan solves the problem more cheaply. Trevor Scott’s experience over four decades helps weigh those options honestly.

If mezzanine does fit, we prepare a package that tells the funder everything they need: budget, valuation, approvals, senior terms and exit. We look across private and specialist funders Australia-wide and coordinate with the senior lender so documents line up. You can outline your project and we will tell you what looks possible.

An illustrative scenario

A small developer has a senior loan covering most of the cost of a townhouse project, but the equity requirement is bigger than their available cash. A mezzanine funder might provide part of the gap, secured by a second-ranking mortgage if the senior lender consents. The cost is higher than senior debt, so the margin in the project must be healthy. Whether it works depends on the numbers and the lenders. This scenario is illustrative only.

When is mezzanine not the right answer?

• When the project margin is too thin to absorb the higher cost
• When the senior lender will not consent to extra security
• When the exit is uncertain or depends on a single sale
• When a joint venture partner or lower senior leverage would be simpler
• When the borrower lacks the experience to deliver the project

We say so plainly if a different route makes more sense. See joint venture property finance and development finance for alternatives.

Documents to have ready

1. Project summary, budget and timeline
2. Valuation or sales evidence for the end product
3. Senior loan offer or term sheet
4. Planning approvals and builder contracts
5. Entity structure and guarantor information
6. Your financial position and track record

Our guides on development finance for first-time developers and how private lenders assess your loan add useful context.

What are the costs and trade-offs?

Mezzanine funders accept more risk than a senior lender, so their pricing, fees and conditions reflect it. We do not publish rates, because every deal is priced on its own circumstances, but it is fair to say the cost is higher than senior debt and the term is usually shorter. Fees, interest treatment and repayment mechanics vary, and some funders take interest at the end rather than monthly.

The trade-off is leverage. By using mezzanine, a developer commits less cash to the deal, which can lift the return on that cash when the project works. It also magnifies pressure when a project runs late or sells below plan. A healthy margin and a realistic budget are therefore the starting point, not a nice extra.

How does the intercreditor agreement work?

When two lenders have claims over the same project, they agree in writing how their rights fit together. That document is the intercreditor agreement. It typically covers who ranks first, whether the mezzanine funder can enforce, what happens if the senior lender takes action and whether the senior lender must be notified of defaults.

These agreements can be negotiated, and the terms influence whether a senior lender will consent at all. Because they involve legal drafting, the parties’ solicitors are heavily involved. We coordinate timing so everyone is working to the same settlement date and the borrower is not caught in a gap.

Can mezzanine work for smaller deals?

Mezzanine is more common in larger projects, but smaller versions exist, often as a second or third-ranking mortgage over the same property. Our second mortgage and third mortgage pages explain how those operate in simpler form. For a modest townhouse project or a business purchase, a second-ranking facility may achieve the same goal with less paperwork.

We look at the size of the gap, the senior lender’s stance and the exit before recommending a route. Sometimes the answer is that a smaller project or a different senior loan avoids the need altogether, and we say so.

Ready to close your funding gap?

Sounds like you need mezzanine finance to bridge a funding gap. We’re the lending experts in layered commercial funding, so click the button below and see if you qualify.