A mezzanine lender review is not simply a comparison of interest rates. For a developer facing a settlement date, construction cost overrun or funding gap between senior debt and available equity, the right lender can keep the project moving. The wrong structure can put pressure on cash flow, restrict the eventual refinance and give the lender disproportionate control when conditions change.

Mezzanine finance sits behind a senior lender in the capital stack and ahead of equity. It is higher-risk capital, so it generally costs more than a first mortgage. In return, it can provide the additional leverage needed to acquire a site, complete construction, fund head works, release equity from retained stock or bridge a project through to sale or refinance.

The review needs to focus on whether the lender, facility terms and exit strategy suit the actual deal. A quick approval means little if the senior lender will not consent, the valuation does not support the total debt, or the loan matures before the project can realistically be completed and sold.

What a mezzanine lender review should cover

A suitable mezzanine lender should understand where their security ranks, how they will work alongside the senior lender, and what event will repay them. This is particularly relevant for Australian development transactions, where planning delays, builder issues, pre-sale requirements and changing valuations can materially affect the original programme.

Review the lender as carefully as they review the project. Ask whether they fund the type of asset and stage of development you are presenting. A lender comfortable with completed commercial property may not have the appetite for a partially built townhouse project, a regional industrial site or residual stock. Likewise, a lender that advertises high leverage may still require conservative presales, substantial borrower equity or a proven delivery track record.

The objective is not to find the lender promising the highest loan amount. It is to secure capital that can coexist with the senior facility and leave enough time and flexibility to execute the exit.

1. Confirm the total leverage, not just the mezzanine amount

A mezzanine facility should be assessed against the full capital stack: senior debt, mezzanine debt and borrower equity. The critical figure is often the combined loan-to-value ratio, or LVR, and for a development it may also be the loan-to-cost ratio, or LTC.

For example, a senior lender may advance 60 per cent of an as-is or end-value valuation, with mezzanine funding taking the overall leverage to 70 or 75 per cent. That extra capital can reduce the equity required from the borrower, but it also narrows the buffer if values soften or costs rise.

Ask what valuation the lender will rely on, whether interest is capitalised, and whether the maximum facility includes establishment fees, legal costs and contingency. A headline loan amount can look attractive until those costs are deducted at settlement or added to the debt balance.

2. Check how pricing affects the real cost of capital

Mezzanine pricing is usually higher than first mortgage pricing because the lender is taking subordinated risk. The rate matters, but it is only one part of the cost. Establishment fees, line fees, legal costs, valuation costs, drawdown fees, exit fees and default interest can materially alter the result.

Capitalised interest can be helpful where a project has no immediate rental income or sales revenue. It preserves cash flow during the build. However, it compounds the debt and may reduce the available equity at exit. Serviced interest may lower the final balance but requires reliable monthly cash flow.

Request a clear facility illustration showing the net proceeds at settlement and the estimated balance at the expected exit date. Then test the numbers against a delayed exit. If sales settle three or six months later than planned, can the project still repay both lenders without a forced discount?

3. Understand the intercreditor deed before committing

Where there is a senior lender and a mezzanine lender, an intercreditor deed or priority arrangement is central to the transaction. It sets out whose debt ranks first, when the mezzanine lender can enforce, how information is shared, and what happens if there is a default.

Borrowers sometimes focus on the mezzanine term sheet and leave this document to the lawyers. That is risky. Intercreditor terms can determine whether the mezzanine lender can block changes to the senior facility, require consent for further drawings, or step in if the senior debt is in default.

Check whether the senior lender has already approved subordinate finance. Some first mortgage lenders prohibit it entirely, while others will consider it within defined leverage limits. Getting mezzanine approval first does not solve the problem if the senior lender will not sign the priority documents.

4. Match the loan term to the real exit timetable

A mezzanine loan is generally a short-to-medium-term solution, not permanent capital. The exit may be settlement of completed stock, a refinance to a lower-cost facility, sale of the asset, or the introduction of new equity.

The exit should be more than a statement that the property will be sold. Consider the time required to complete works, obtain occupancy or titles, market the stock, settle sales and clear the senior debt. For a refinance exit, assess whether the future lender will accept the borrower, asset and valuation once mezzanine debt is included in the current stack.

Build in a practical time buffer. Loan extensions are sometimes available, but they are not automatic and may carry fees, revised pricing or a request for additional equity. A lender that is flexible at the start may become far less flexible when the facility is close to expiry.

5. Review security, guarantees and control rights

Mezzanine lenders may take a second mortgage, caveat, share security, general security agreement, assignment of project documents or personal and corporate guarantees. The security package depends on the asset, entity structure and senior lender requirements.

For company and trust borrowers, confirm precisely which entities are borrowing, giving security and providing guarantees. A guarantee may expose directors or related entities beyond the project vehicle. If there are multiple properties or businesses in the group, make sure the lender’s security is limited to what has been agreed.

Also examine control rights. Reporting obligations, approval rights over variations, sales and further debt can be reasonable protections for a lender. They become problematic if they prevent ordinary project decisions or create delays during a time-sensitive construction programme.

6. Test the lender’s drawdown process

A facility is only useful if funds can be accessed when invoices fall due. Development and construction transactions commonly use staged drawdowns, with funds released against quantity surveyor reports, invoices, progress claims or updated valuations.

Ask how long a draw request takes, what documents are required and whether there is a minimum draw amount. Clarify who pays for quantity surveyor inspections and whether the lender holds a contingency reserve. If the senior and mezzanine lenders have separate approval processes, understand how they will be coordinated.

This matters most where a builder, supplier or settlement agent needs funds by a fixed date. A small administrative delay can become a much larger commercial problem if works stop or a contract is placed at risk.

7. Assess the lender’s track record with complex deals

Private credit is not a single product. Lenders differ in their appetite for impaired credit, incomplete developments, no pre-sales, residual stock, regional assets and unusual security structures. A lender may be credible but still unsuitable for your circumstances.

Look for practical questions during the assessment process. A capable lender will want to understand the valuation, planning status, construction contract, debt position, borrower contribution and exit. That level of scrutiny is often a positive sign, provided the lender can make decisions within the required timeframe.

It can also be useful to compare more than one structure. One lender may offer a higher leverage point with tighter controls and a shorter term; another may advance less but offer a cleaner intercreditor position and more realistic extension options. The cheapest rate is not always the lowest-risk choice.

Getting the structure right before settlement

Mezzanine finance can be a practical answer when bank funding leaves a gap, equity is tied up in property, or a project needs capital to reach a value-creating milestone. It is not suitable for every transaction. If the exit relies on an optimistic valuation, uncertain approvals or sales that have not been properly tested, adding subordinated debt may increase rather than solve the risk.

No Doc Loans can assess the funding requirement, existing senior debt and proposed security before matching eligible borrowers with suitable private lending options from its lender panel. The most productive starting point is a clear picture of the asset, current debt, required funds, project timetable and intended exit. With those details established early, you can negotiate a mezzanine facility that supports the deal rather than becoming the next obstacle to getting it finished.