Mezzanine finance

A second layer of debt that sits between the senior development facility and the developer's own equity. It is usually secured by a second mortgage over the site and repaid after the senior lender from the same sale proceeds. Developers use it to fill an equity gap on a project a senior lender will otherwise fund.

Position and price. Senior debt is repaid first from sale proceeds and is secured by a first mortgage; mezzanine debt is repaid after it and is priced higher to reflect that. Senior lenders also set the terms the second layer has to live within, which is why the two are negotiated together.

Yes. A second mortgage cannot sit behind a senior facility without that lender's consent, and the two lenders sign a priority deed recording who is repaid first. Some senior lenders will not consent at all, which is part of why the senior facility and the mezzanine facility are best arranged together.

It is priced above senior debt, because it is repaid last and carries more risk. The real cost is not the pricing on its own, it is what the second layer takes out of your development margin. That is why the first thing we do is rerun your feasibility with the extra debt in it.

When the project margin is too thin to absorb it. Adding subordinated debt to a feasibility that is already tight converts your profit into interest and leaves nothing for a cost overrun. If the numbers only work on optimistic end values or a fast selldown, more debt is the wrong answer.

In practice most mezzanine facilities on Perth developments are second mortgages, so the terms get used interchangeably. The distinction that matters is priority: the mezzanine lender is behind the senior lender for repayment regardless of how the security is documented. That ranking is what sets the price.

It is possible and it deserves harder questions. Lenders look closely at the builder, the contract and the selldown when the developer has no track record, and a second layer of debt magnifies every one of those risks. A more conservative first project is usually the better route.

From the sale of completed stock, after the senior facility has been cleared. Interest is generally capitalised through the build, so the balance grows until the selldown begins. A slow selldown costs a mezzanine-funded project more than a conventionally funded one, which is why the programme is modelled before the facility is taken.