Mezzanine finance ("mezz") is debt that ranks behind senior secured debt but ahead of equity in the capital structure. On a development site funded with 60% senior debt and 20% mezz, the senior gets paid out first, the mezz gets paid out before the equity sees any return, and the sponsor's equity sits at the bottom of the stack.
Mezz prices well above senior debt because the risk position is materially worse, if the project underperforms, mezz absorbs losses before the equity but after the senior is made whole. Typical mezz rates in Australian development sit at 14-22% p.a. against senior development debt at 9-13%.
For sponsors, mezz reduces the equity requirement on a project, a 70% LVC project might be funded 50% senior + 20% mezz + 30% equity instead of 50% senior + 50% equity. The economics work when the project IRR exceeds the blended cost of senior + mezz; they fail when the project struggles and the mezz becomes the loss-absorbing layer.
Archer Wealth doesn't currently write mezz as a standalone product, our development files are senior secured first-mortgage positions only. Mezz is provided by specialist mezz funds and family-office capital in this market.