Many large, securitized commercial real estate loans feature additional levels of debt which are typically held outside of the securitization vehicle.
The additional debt may take the form of either a mezzanine loan (secured by ownership interests and not by the real property) or an A/B mortgage loan. In an A/B loan the entire loan is made to the entity that owns the property. The senior loan (“A”) and the subordinate loan (“B”) are sometimes supported by separate notes but there is usually a single loan agreement and a single mortgage which secures both the senior loan and any subordinate loans. The B interest (commonly referred to as the B-Note) is subordinate to the A-interest (A-Note) in payment priority and loss allocation. In many cases the B-Note has been split into multiple interests (or “tranches”) exhibiting the same senior/subordinate structure.
Sometimes the “B” interest will not have its own promissory note but will hold merely a junior participation interest in a mortgage note (held outside of the “A” loan’s securitization). These arrangements typically mean that the “B” holder only has an indirect relationship with the borrower and the “B” holder’s rights are governed by a Participation Agreement (sometimes this may be referred to as an “Intercreditor Agreement”).
There will likely be a great deal of litigation in the coming years regarding the rights of the parties to these intercreditor agreements. Some issues which may arise include:
– to what extent can a “B” note holder enforce loan remedies against the servicer.
– how does a “B” note holder protect it’s rights when facing an appraisal of the property which places a value far less than the value which supported the original loan.
– who is controlling holder and when and how is that determination made.
– what happens to the rights of the note holders when a loan goes into default.
– what rights does a “B” note holder have to purchase the “A” note.
– What are B-Note holder’s rights to transfer its interest.
These loans and intercreditor agreements have a number of complex issues given the diminishing values of commercial real estate. If you would like to discuss the circumstances surrounding your note, give me a call.