During the last decade (at least until the turndown in 2008), obtaining multiple levels of debt on large commercial real estate assets grew increasingly popular for developers and operators. Frequently, such a structure consisted of a first mortgage loan and subordinate mezzanine debt. The document governing the relationship between a first mortgage lender and a mezzanine lender is commonly referred to as an “intercreditor agreement.” As the economy went south, the corresponding decrease in value of commercial real estate resulted in many mezzanine loans becoming virtually worthless to the respective lender. As the value of a property drops to or below the amount of the outstanding first mortgage loan, the mezzanine lender is left with a de facto unsecured debt to a company that, in all likelihood, has no other assets. In an effort to find some value in their investments, mezzanine lenders have been coming into conflict with better situated mortgage lenders that are looking to the same distressed property as security for their senior loans. Although the enforceability of intercreditor agreements in both bankruptcy and non-bankruptcy proceedings has generally been affirmed by the courts and state legislatures,1 there is no body of well developed case law governing conflicts between mezzanine and mortgage lenders, rather it is a developing area trying to find a reliable direction.
A typical mortgage/mezzanine structure originated prior to 2008 might include a first mortgage loan in an amount equal to 75 percent of the collateral property’s value and a mezzanine loan for an additional 10 percent to 15 percent (resulting in the total debt on a property often being in excess of 85 percent or 90 percent of its value). The mortgage loan would be made directly to the property owner and be secured by a first mortgage. The mezzanine loan (typically including a higher interest rate than the mortgage loan) would be subordinate to the senior mortgage loan, made to the direct parent entity of the property owner and be secured by a pledge of its borrower’s ownership interests in the property owner. At the closing of the two loans, the mortgage lender and the mezzanine lender would enter into an intercreditor agreement meant to govern the relationship between the two lenders and, among other things, set forth various rights and remedies each would be entitled to take against their respective borrowers.
