Direct answer
Mezzanine and preferred equity is subordinated capital that sits between senior construction debt and the developer's own equity, topping up the capital stack so a project can proceed with less of the developer's cash tied up, or start sooner than waiting to accumulate that equity would allow. In Australia it is arranged through private lenders and specialist funds, secured by a second mortgage, share security or a deed of priority behind the senior lender, typically running twelve to thirty-six months on projects from $1m up to $30m and beyond.
Who uses it and why
Mezzanine and preferred equity is reached for by developers whose senior construction debt, typically extending to a loan-to-cost ratio in the order of 65–80%, does not cover the full cost of the project, leaving a gap that would otherwise need to be filled entirely from the developer's own funds. Rather than tying up that much capital in a single project, or slowing the project's start while equity is raised elsewhere, a developer brings in mezzanine debt or preferred equity to bridge the gap, preserving their own cash to run multiple projects concurrently or to retain a larger share of the project's ultimate profit.
This is capital for experienced developers running larger or multiple projects, not an entry point for a first development. The provider of mezzanine or preferred equity is taking meaningfully more risk than a senior lender — it sits behind the senior debt in the event the project underperforms — and prices and structures accordingly, typically with a return that reflects both an interest-style component and, in a preferred equity structure, a share of the project's profit above a hurdle. Typical borrowers are developers with a strong track record seeking to gear a project more highly than senior debt alone allows, or to preserve equity across a broader development pipeline.
The decision to bring in mezzanine or preferred equity is ultimately a trade-off between the cost of that capital and the value of what it unlocks — an earlier start, a larger or more ambitious project, or capital freed up to run a second site concurrently. For the right developer and the right project, that trade-off is straightforward; for a marginal project, the additional cost of subordinated capital can be the difference between a feasibility that works and one that doesn't, which is why the underlying project economics are scrutinised as closely as the developer's history.
What lenders look at
The senior debt position is the starting point for every assessment: what has the senior lender agreed to, at what loan-to-cost ratio, and on what terms, since the mezzanine or preferred equity provider is filling the remainder of the capital stack behind that facility. Combined gearing, including senior debt and the mezzanine or equity layer together, can extend beyond 80% of total project cost, reflecting the additional risk this layer of capital is taking on.
The developer's track record is examined closely and is generally the single biggest factor in whether a file is fundable at all — a developer who has successfully delivered comparable projects presents a materially different risk than a first-time development, and the panel for this product, weighted almost entirely toward specialist funds and sophisticated private lenders rather than banks, prices and structures around that history. Feasibility, presales, and the project's margin above both senior debt and the mezzanine layer are all scrutinised, since the provider's return ultimately depends on the project completing successfully and at or near budget.
Security is typically a second mortgage or share security behind the senior lender, formalised through a deed of priority that sets out each party's rights, and documentation is generally full-doc given the scale and complexity of these facilities — detailed feasibility, an established relationship with the senior lender, and full financial disclosure are all standard requirements. Credit history is assessed with a reasonable but not unlimited tolerance: minor, explained defaults will not typically exclude an otherwise strong developer, but this is not a wide-tolerance product in the way some shorter-dated, smaller facilities in the category are.
Typical terms
|
|
| Size |
$1m to $30m+, subject to lender assessment |
| LVR |
Combined gearing can extend beyond 80% of total project cost |
| Term |
Twelve to thirty-six months |
| Speed |
Indicative approval in 21–42 business days from a complete feasibility |
| Security |
Second mortgage, share security, or a deed of priority behind the senior lender |
| Pricing |
Priced on risk and security; indicative range on enquiry |
Structures we see most
Mezzanine debt behind senior construction finance. A straightforward subordinated loan, typically carrying an interest rate above the senior facility's, secured by a second mortgage and formalised through a deed of priority with the senior lender.
Preferred equity. Structured as equity rather than debt, with a fixed preferred return and, in many cases, a share of profit above a defined hurdle, used where a developer prefers to keep gearing ratios lower on paper or where debt-style mezzanine is not available for the project.
Multi-project facility. A single mezzanine or preferred equity line supporting a developer's capital position across several projects at once, rather than being tied to one site, used by developers running an active pipeline.
Preservation-of-equity structure. Used specifically to reduce the amount of a developer's own cash required in a single project, freeing that capital to be deployed into the next site or project rather than being locked up until the current one settles.
Early-stage top-up. Brought in alongside senior debt from the outset of a project, rather than added later, to allow the project to proceed on a timetable the developer's own capital position could not otherwise support.
Costs and how we're paid
Pricing on mezzanine and preferred equity reflects the subordinated position, the developer's track record, project feasibility and the combined gearing involved, and is quoted on enquiry once a provider has reviewed the full feasibility — no flat rate applies across the product. Structures may include an establishment fee, an ongoing interest-style return, and, for preferred equity, a profit share above an agreed hurdle; all costs and structures are set out in the offer before a developer commits.
Solara is remunerated by the capital provider, the developer, or both, depending on structure, which may include a commission and/or a broker fee agreed with the developer. Any commission or fee is disclosed in writing before an application proceeds.
Process and timing
- Initial scoping call — typically same day. We confirm the project, the senior debt position already in place or being sought, the capital gap and the developer's track record.
- Feasibility and document collection — typically 5–10 business days. Full project feasibility, senior lender terms, financials and evidence of the developer's prior projects.
- Provider matching and submission — typically 3–5 business days. We place the file with the specialist funds and private lenders whose appetite matches the project size and structure.
- Approval and offer — typically 15–30 business days, reflecting the depth of assessment and the coordination required with the senior lender.
- Documentation and drawdown — typically 5–10 business days once terms are accepted and the deed of priority with the senior lender is finalised.
Frequently asked
What is mezzanine finance?
It is subordinated debt that sits behind senior construction debt in a project's capital stack, used to fill a funding gap between what the senior lender will advance and the total cost of the project, secured by a second mortgage or share security.
What is preferred equity, and how does it differ from mezzanine debt?
Preferred equity is structured as an equity investment with a fixed preferred return and often a share of profit above a hurdle, rather than as a loan. It can suit developers who prefer the gearing profile of equity over additional debt, though both structures fill the same gap in the capital stack.
Why would a developer use mezzanine or preferred equity instead of just contributing more of their own cash?
To preserve capital for other projects, to start a project sooner than raising the full equity requirement would allow, or to increase returns on the developer's own capital by gearing the project more highly than senior debt alone permits.
Do I need a strong development track record to access this funding?
Yes, generally. This is capital for experienced developers, and a strong track record of successfully delivered projects is typically the single most important factor in whether a mezzanine or preferred equity provider will support a given file.
How does mezzanine finance interact with my senior lender?
Through a deed of priority, which formally sets out the ranking and rights of the senior lender and the mezzanine or equity provider, agreed by all parties before the mezzanine facility is drawn.
What size projects use mezzanine or preferred equity?
This capital typically supports projects from around $1m up to $30m and beyond in combined facility size, reflecting the scale of developments where a capital stack gap of this kind commonly arises.
Is mezzanine finance more expensive than senior debt?
Yes. It sits behind the senior lender and carries correspondingly more risk, so it is priced above senior debt rates, generally alongside additional structuring or profit-share elements reflecting that risk position.
How long does approval take?
Indicative approval runs from around three to six weeks from a complete feasibility submission, reflecting the complexity of assessing the project, the developer's track record and the coordination required with the senior lender.
Related products
Construction finance — the natural companion facility, since mezzanine and preferred equity is almost always arranged alongside a senior construction loan rather than in place of one.
Land bank loans — worth considering directly for holding a site ahead of the construction and capital-stack planning that mezzanine finance supports.
Commercial property loans — the closer match once a project is complete, income-producing and ready to be refinanced into a standing commercial facility.