Senior plus mezzanine on a four-townhouse project: a worked funding stack
Most developers understand mezzanine debt in the abstract: expensive money that sits behind the senior lender and lets you do the deal with less equity. Far fewer have seen the arithmetic run end to end on a project their size. Here it is.
The project
A four-unit development. Figures are indicative and de-identified.
- GRV: $5.2m — four dwellings at $1.3m each
- NRV (margin scheme, ex-GST): $4.869m
- Construction: $2.2m
- Contingency: 5% of construction
- Professional fees: 4% of construction
- Council and authority fees: 5% of land value
- Build term: 12 months. Loan term: 15 months.
Those percentage assumptions — 5% contingency, 4% professional fees, 5% of land for authority fees — are the standard shorthand lenders apply when they sanity-check a feasibility. Using them makes your model legible to credit.
Step 1: GRV to NRV
Where the margin scheme applies, the lender sizes against net realisable value ex-GST, not the headline GRV. Here that is $5.2m down to $4.869m — a $331,000 reduction before any leverage calculation happens.
Present GRV alongside the margin-scheme NRV in any submission. Presenting GRV alone means the lender does the adjustment for you, and the number that comes back is smaller than the one you promised the client.
Step 2: size the senior at the lesser of two tests
The senior facility comes in at $3.41m, which is simultaneously:
- 70% LVR against the $4.869m NRV, and
- 78.56% of total development cost — just under the typical 80% ceiling.
Pricing on the senior: 9.99% interest, no line fee, 1.5% establishment.
Note how tightly those two tests bind together on a well-margined project. That is not a coincidence — it is what a lender’s matrix is designed to produce. Push either input and one of the two caps bites immediately.
Step 3: size the mezzanine to the actual gap
The mezzanine tranche is $485,000 at 18% p.a. plus a 2.75% establishment fee (about $5,500 in absolute terms on that tranche size).
The mezzanine is not sized to a target LVR. It is sized to the gap: remaining land-refinance debt, plus fees and interest not covered by the senior facility. Working from the gap rather than from a leverage target is what keeps the tranche as small as it can be.
Brokerage across the stack: 1.10%.
What the incremental leverage costs
This is the part worth putting in front of a developer before they commit.
The mezzanine costs 18% against the senior’s 9.99% — roughly 8 percentage points of incremental cost on the marginal dollar, plus a 2.75% establishment fee against 1.5%. Over a 15-month term on $485,000, that is a real number, and it comes straight out of project profit.
The question is never “is 18% expensive.” It is: does the incremental leverage let me do a deal I otherwise could not, and does the project still clear its margin after paying for it? If you are not sure, run the numbers in our feasibility calculator first and check the margin on cost with a realistic finance line in it.
Two benchmarks:
- Private mezzanine lenders commonly benchmark deals against a return on cost hurdle above 15%. On one $2.6m second mortgage, correcting a funding table that had omitted construction costs revealed only 7.9% return on cost.
- A margin on cost in the mid-teens, combined with debt above ~80% of NRV and an equity buffer of ~8% of total development cost or less, is a recognised pattern for a deal that should not proceed.
Structural rules that decide whether the stack works
Term alignment
The mezzanine term should run at least as long as, ideally beyond, the senior facility’s term. A mezzanine maturing before the senior creates an unnecessary separate refinance event on one leg of the stack. Where a mezzanine offer arrives with a mismatched term, the fix is usually just to ask the lender to align it.
Security must be drafted as a second registered mortgage
Explicitly second, sitting behind the senior facility — not a first. Senior lenders’ advisors flag both the term mismatch and the security ranking as red-line due diligence issues.
Drawdown mechanism has to match
Confirm the mezzanine provider’s drawdown mechanism — tranche-based against evidenced progress, or full S-curve — matches how the senior lender draws. A mismatch here strands funds at exactly the wrong stage of the build.
Size the mezzanine for GST and variations, not just net cost
Builder progress claims include GST. Size the mezzanine tranche to explicitly cover the GST component of claims and unforeseen variations, not just net construction cost.
Surplus release is negotiable, progressively
Lenders generally will not release surplus value or capitalise interest upfront — but can often be persuaded to release progressively against the QS’s certified completion percentage, staged for example around 50% and 75%.
Getting a mezzanine read before you spend money
Do not order a valuation and QS report to find out whether mezzanine appetite exists. Get an informal read first.
On one nine-townhouse project, a mezzanine lender confirmed informal appetite from the feasibility, the sponsor’s assets and liabilities, the planning permit and plans, and the borrower’s completed-project track record alone. Only once appetite was reasonably confirmed was a formal indicative term sheet requested and valuation and QS instructed.
What a mezzanine lender needs before issuing a term sheet is modest: the exact amount required, settlement status, construction start date and staging, and the sponsors’ asset-and-liability position and development experience. Supplying that proactively speeds everything.
What mezzanine investors actually care about
Not yield. Presales traction and a credentialed builder.
One group declined an 18%-target mezzanine opportunity on a seven-townhouse project purely on zero presales and an unproven builder — and confirmed directly that a higher rate would not have changed the answer. In a cautious credit environment, a funder that might otherwise consider no-presale lending will firm up to require at least one presale subject to due diligence.
No-presale construction funding from private credit desks is achievable, but it bundles in oversight cost. One observed structure: an initial draw at 70% LVR of day-one land value less capitalised interest, then monthly progress draws to 70% of as-if-complete value, at 9% p.a. plus a 1.5% line fee and 2% establishment — plus a $5,000 due diligence fee and a $4,000 per month fee for a lender-appointed superintendent overseeing the build. Factor the superintendent cost into feasibility when comparing no-presale against presale-conditioned facilities.
Two ways to shrink the mezzanine tranche
- Negotiate contingency down to the QS’s own figure. A lender’s headline contingency allowance in a funding table is negotiable. Request the itemised breakdown and push to align it with the project QS’s recommended figure — commonly around 5%. Every dollar of excess contingency reduces funds actually released at settlement.
- Be precise about what comes off GRV, and when. Arguing to exclude contingent, settlement-only selling commissions — as distinct from a genuine upfront marketing cost line — from the GRV sizing calculation can materially shrink an apparent equity or mezzanine shortfall. On one file that argument settled a mezzanine principal at $2.3m as a compromise once a 2% sales commission was excluded.
General information only. It is not credit assistance, financial product advice, or an offer of finance, and it does not take account of your objectives, financial situation or needs. All figures are indicative, de-identified observations over 2024–2026 and vary by lender and deal.