Borrower Considerations in Multiple Lender Transactions
Publication| Real Estate Services
During the past several decades, real estate financings have developed from fairly simple borrower/single-lender relationships to structured multiple-lender and capital-markets driven arrangements. Lower pricing and increased loan proceeds have made these types of transactions very attractive to borrowers. However, borrowers may not fully appreciate the intangible costs that arise out of the changes to the relationship between a borrower and its lender. Unfortunately, some borrowers experience the consequences of these changes at critical times.
The effects of these changes are varied. In a syndicated loan transaction, lenders join together to offer loans that are larger than what would be offered by a single lender. One result is that consent of multiple lenders may be necessary for key decisions, including in the context of restructurings. Another result is that the composition of a lender syndicate may change, sometimes without the consent of a borrower. In a mezzanine financing transaction, a mortgage lender, although holding a senior position, cedes or shares many aspects of control of a borrower and the underlying mortgaged property to a mezzanine lender. In those same transactions, the interest of a mezzanine lender may be transferable without the consent of a borrower. In addition, the typical documentation provides a mezzanine lender with remedies that, depending on the jurisdiction, may be far more powerful than the remedies provided to a mortgage lender. Some of these issues appear in different forms in other types of transactions. For example, the potential for unexpected guarantor liability may lurk beneath the surface of a preferred equity transaction.
This article will explore changes to the traditional borrower/single-lender relationship that arise in syndicated loan and mezzanine loan transactions, with an emphasis on a borrower’s perspective. This article will also highlight some borrower and sponsor concerns about their relationship with their mortgage lender that may arise in a preferred equity transaction.