Senior debt is the construction facility that does the heavy lifting: 60–75% of total development cost, secured by a first mortgage, first to be repaid from settlements. Mezzanine finance stacks behind it — second-ranking security, combined leverage to 85–90% of cost — and is priced for the position it holds: if the project underperforms, mezzanine wears the loss before the senior lender loses a dollar.
The capital stack, in order
Every development is funded by a stack, repaid from the bottom of this list up:
- Senior debt — first mortgage, lowest cost, repaid first.
- Mezzanine debt — second mortgage or unregistered loan, repaid next.
- Preferred equity — priority over your equity inside the ownership structure.
- Your equity — last money out, which is why it earns the profit.
Since APRA's capital settings pushed the major banks back from development lending, most stacks on projects between $2M and $15M are senior facilities from non-bank lenders, with private credit funds supplying the mezzanine layer where it's used.
What mezzanine actually costs
Rule of thumb: two to three times the senior rate, commonly landing high-teens or above all-in once establishment fees and line fees are counted. Quoted next to the senior facility it looks indefensible. That's the wrong comparison.
The right comparison is the alternative source of the same money: a joint-venture equity partner, who typically wants 40–50% of project profit. On a $6M-cost project with a $1.5M expected profit, mezzanine that fills a $600k equity gap might cost $120k–$150k over the term. A JV partner filling the same gap takes $600k–$750k of the profit. Expensive debt is routinely cheaper than cheap-looking equity.
When the stack makes sense
Mezzanine earns its place in three situations: your equity is spread across other projects and pulling it back costs more than the coupon; the site opportunity is time-boxed and raising equity is slow; or you're scaling from one project at a time to two. It makes no sense when the project's profit-on-cost is thin — leverage amplifies both directions, and a 15% profit-on-cost deal at 90% combined LTC is a rounding error away from losing your equity entirely.
The intercreditor deed is the deal
Mezzanine only works if the senior lender consents, and the consent lives in an intercreditor deed: who ranks where, what happens on default, standstill periods, step-in rights, whether the mezzanine lender can cure a senior default to protect its position. Some senior lenders won't allow a second mortgage at all — in which case the layer gets structured as preferred equity inside the project entity instead, similar economics, different legal position.
Two practical consequences. First, you choose the senior lender and the mezzanine lender as a pair, not sequentially — a sharp senior rate from a lender that refuses intercreditor deeds is useless to a stacked deal. Second, the deed takes legal time; a stack assembled the week before land settlement is a stack that misses settlement.