Mezzanine Finance Costs in Australia: Interest, Fees and Blended Project Cost
Mezzanine pricing and project economics · Australia
Mezzanine Finance Costs in Australia: Interest, Fees and Blended Project Cost
How developers can compare the complete dollar cost of a subordinated facility, including capitalised interest, fees, monitoring and extension risk.
The practical answer
Cost model
Start with net usable funds and the full term
The facility headline may exceed the cash available for construction or acquisition because interest, lender fees and transaction expenses can be deducted, retained or funded inside the loan. Ask for a sources-and-uses schedule that reconciles the gross commitment to the net amount released.
The mezzanine finance overview explains why senior debt and mezzanine exposure must be reviewed together. Cost modelling should do the same: every senior and subordinated balance affects peak leverage and the equity buffer.
Interest
Serviced monthly, retained from proceeds, capitalised to the balance or combined across different periods.
Establishment and commitment fees
Upfront compensation for arranging and reserving the facility, whether fully drawn or not.
Third-party transaction costs
Legal, valuation, quantity-surveyor, due-diligence, registration and intercreditor costs.
Exit and extension costs
Discharge, exit, minimum-interest and extension amounts that may apply at repayment or after the expected term.
Dollar comparison
Annualised pricing can hide timing and compounding
A higher annualised rate on a short, efficiently drawn facility may cost fewer dollars than a lower rate applied to a larger balance for longer. Conversely, a delayed project can magnify cost when interest capitalises, fees are calculated on commitments, and extension pricing applies.
Model at least the expected case and a delayed case. Both should show the monthly balance, remaining contingency, projected settlement receipts and the point at which the combined debt approaches the lender’s limit.
| Cost item | Questions to ask | Project effect |
|---|---|---|
| Base interest | On drawn funds, committed funds or gross facility? | Changes monthly accrual and peak debt |
| Capitalised interest | How much is retained and for what period? | Reduces net proceeds and compounds leverage |
| Establishment fee | Calculated on commitment or amount drawn? | Upfront cost, often funded from the facility |
| Monitoring and QS | Fixed, per drawdown or reimbursed at cost? | Ongoing cash or funded expense |
| Exit/minimum interest | Payable regardless of early repayment? | Can reduce the benefit of an early exit |
| Extension/default | What triggers the higher rate and additional fee? | Can materially reduce project margin |
Blended capital stack
Measure cost across senior debt, mezzanine and equity
The commercial question is not whether mezzanine is expensive in isolation. It is whether the combined capital stack produces a supportable project margin and a better risk-adjusted developer outcome than contributing more equity, accepting an equity partner or restructuring the project.
Australian Government business guidance recommends comparing interest, upfront and ongoing charges, security, term and restrictions when assessing business loans. A development comparison should extend that discipline to every capital provider and the full delivery period.
Practical checks
- Calculate senior and mezzanine interest using actual draw timing.
- Include capitalised costs in combined peak debt and leverage.
- Show developer equity as cash, land equity and completed works—but avoid double counting.
- Recalculate project margin after all finance and selling costs.
- Test how a six-month delay changes the dollar cost and remaining buffer.
04
Model the exit date, not only the headline rate
A facility that looks acceptable at month 12 can become expensive if settlements, refinance or asset sales move to month 15 or 18.
Expected case
Use the realistic programme and expected repayment date, including ordinary administrative time.
Slow case
Add a sensible delay to settlements, refinance or construction and include interest plus extension charges.
Downside case
Test whether the project can still repay if value, timing or costs move against the base case.
The sensitivity test should answer:
- Confirm whether the term includes extension options or requires fresh approval.
- Identify the default rate and when it starts.
- Check whether unused interest is refundable on early repayment.
- Keep contingency outside the exact amount required to complete the project.
05
Questions to ask before accepting a term sheet
The best comparison is a schedule showing cash received, cash paid, peak debt and repayment under the same dates for every lender.
Compare structure as well as cost
A cheaper facility can still be unsuitable if drawdown conditions, reporting or repayment timing do not match the project.
Check the full debt package
For a broader comparison with preferred equity and joint venture capital, read our mezzanine capital comparison guide.
Ask for the commercial mechanics in writing
- What is the gross facility and the net cash available after deductions?
- Is interest paid monthly, capitalised, retained or deducted in advance?
- Which fees are payable even if the loan does not settle?
- Are broker, legal, valuation, quantity-surveyor and registration costs included?
- What happens if the loan repays early or requires an extension?
- Does the facility require senior-lender consent or an intercreditor deed?
Sources
References and further reading
Zip Funding recommends obtaining independent legal, tax and financial advice for each transaction.
Useful starting points
- Australian Government business.gov.au — applying for a business loan, including comparison of interest, fees, term, security and restrictions.
- Zip Funding — Mezzanine Finance vs Preferred Equity and Joint Venture Capital.
- Zip Funding — flagship mezzanine finance guide and enquiry pathway.
Continue the mezzanine finance series
Related guides for the next decision
Mezzanine vs preferred equity and JV capital
Compare ownership, priority, control, cost and downside exposure.
Intercreditor deeds and senior consent
Review payment priority, cure rights, standstill and enforcement control.
Completion and cost-to-complete gaps
Assess overruns, draw controls, contingency and the repayment critical path.
Frequently asked questions
Mezzanine finance cost FAQs
Can mezzanine interest be capitalised?
Often it can, subject to the facility terms and the total leverage available. Capitalising interest reduces monthly cash outflow but increases the balance that must be repaid.
Why can net funds be lower than the gross facility?
Retained interest, establishment fees and transaction costs may be deducted from or funded within the approved limit. The term sheet should show the net amount available for project use.
Is early repayment always cheaper?
Not necessarily. Minimum-interest periods, early-exit fees or non-refundable costs can reduce the saving, so compare the actual payout on the proposed date.
How should developers compare two facilities?
Use identical drawdown and repayment dates and compare net proceeds, peak debt, total dollar cost, conditions, security and downside consequences.
A clearer funding review
Compare facilities using net funds, peak debt and the total dollar cost through a realistic exit date.
Zip Funding can review the senior facility, developer contribution, verified project costs, proposed mezzanine layer and exit as one capital stack. Any structure remains subject to lender appetite, valuation, due diligence, legal documentation and approval.
General information only. This article is educational and does not constitute financial, legal, tax or credit advice. Mezzanine finance can involve subordinated security, higher costs, restrictive covenants, enforcement risk and loss of developer equity. Terms, leverage, security and timing vary. Obtain independent professional advice appropriate to the transaction.
