A/B Commercial Real Estate: Controlling Holder

Many commercial real estate loans are referred to as A/B loans. This means that an entire loan is made to the property owning entity by more than one lender. The senior lender is usually referred to as the “A” lender and the subordinate lender is usually known as the “B” lender. Lenders who are further subordinate are then “C”, “D” etc.

These loans may be evidenced by separate promissory notes but the property owner typically has one loan agreement and a single mortgage which secures both loans. The documents which govern the rights of the lenders are the Pooling and Servicing Agreement and the Participation Agreement. Usually the “A” lender acts as the servicer for the loan. 

The “B” lender has very little control over the administration of the loan or over the ability to call the note or force a borrower into bankruptcy or receivership. However, a “B” note holder does have certain rights as a “Controlling Holder.” The Controlling Holder has certain veto rights when it comes to actions proposed by the servicer. In some intercreditor agreements the Controlling Holder may even have the right to fire the servicer/special servicer. 

Therefore, determination of who is the Controlling Holder can be especially significant. The Controlling Holder is usually defined as the junior most participant who holds at least 25% of its original investment. Here is where it gets tricky. How do you determine whether the junior most participant still holds 25% of its original investment? An appraisal. The appraisal (or “reappraisal”) is triggered by the occurrence of some major event (default, bankruptcy etc.) An appraisal is performed as junior participants wait to see whether the value of the property still keeps them “in the money.” If the value falls too much, their subordinate interest may be in jeopardy. 

I represented a junior participant who was in a dispute with the “A” holder and another junior participant over the appraisal process and the designation of “Controlling Holder.” The issues were unique for these times. I will post a copy of the pleadings in a separate post in the next few days.


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