Co-Lender Mortgage Loan Structures: Understanding the Lender Structure is Critical (First of Two-Part Series)
1st in a series of 2 postings
Much of the focus in the media on troubled real estate debt focuses on sophisticated debt structures, or on investors holding bonds in pools of loans. This focus, however, misses an important, intermediate player between these two ends of the barbell: the real estate lender.
In several real estate workouts that I’m handling now, the most difficult discussions are not with the borrower or its lawyer. Instead, the difficulty is within the mortgage lender group itself. Indeed, one distinctive in the current workout environment from the late 80’s is the large number of real estate loans involving multiple lenders holding a portion of the same mortgage loan or lien position.
Now, I’m not describing the situation where one lender has the mortgage lien, a second lender has a lien on the ownership interests in the borrower, and perhaps a third lender has an unsecured loan with the entity owning an interest in the entity owning the borrower.
Instead, I’m describing a single mortgage loan or facility that has been syndicated or participated among multiple real estate lenders. While the multiple or “co-lender” mortgage structure is not new to life insurance company lenders (nor to balance sheet lenders), in the last 15+ years the co-lender mortgage structure became widely used by the broader creditor market; and banks, Wall Street (the investment banks) and mortgage funds joined life companies in “structuring” the first-lien position.
This posting is Part One of a two-part series covering initial due diligence topics for workouts involving co-lender structures, with a focus solely on the participated or syndicated co-lender structure. The series is not a comprehensive listing of possible issues on this topic, but merely a basic template for your use as you read the co-lender agreements and related loan documents.
An understanding of these topics will assist you in setting up the return volley to the borrower from the co-lender side of the net; or at least help you quickly understand “where” the co-lender base line is located.
Nature of interest: what is the nature of the co-lender interest?
Here (attached PDF) is a short comparison of the typical differences between a participation structure (one note) and a syndication structure (multiple notes) (Note, however, that many of the typical differences between a participation and a syndication are addressed in the purchase/servicing agreement.)
- "club" structure typically does not use a placement memo
- “A” note and “B” note structure has some unique issues and are NOT covered by this brief listing
Key documents and “big picture” issues
- sale\servicing agreement or intercreditor agreement
- is servicing "rotated" or does servicing always remain in a specific co-lender?
- this is one of the key documents; read it
- loan documents: are co-lenders named on the note/security instrument?
- what are the regulatory issues or balance sheet issues for each co-lender?
Funding by Co-lenders
- one-step (to borrower closing) by all co-lenders
- multi-step (borrower closing by originator lender; then separate, future fundings by co-lenders)
- effect of failure to fund
Change in Lead\Servicer
- default or insolvency
- resignation (voluntary; involuntary)
- removal rights?
If you have any comments, suggestions or additions to the foregoing, please post a comment.
