Today's distressed real estate loan is a complicated affair, with many diverse parties pursuing objectives and interests quite different and more complex from those just a few years ago. Layer upon layer of debt—real estate, mezzanine, preferred equity—have become the norm; lenders and investors have competing interests and remedies; relationships among lenders (some “in the money” and some not) have become as important, contentious and sophisticated as relationships between mortgage lenders and borrowers of real estate down cycles past.

Today's capital stack is filled with national and international hedge or private equity funds, or opportunistic or strategic lenders, which may have purchased a debt position at a discount, or even originated the loan with the intention (or hope) of becoming the owner of the collateral through foreclosure. These lenders often provide financing with interest rates and covenants that increase the prospects of default in a rising interest rate environment or, as now, at the tail end of the real estate cycle. These (often unregulated) lenders may have increased litigation staying power as a result of: (1) a greater ability to own, hold, manage, and liquidate the collateral at a profit; (2) their low basis in the underlying obligation; and (3) far less regulatory scrutiny of their capital structure, loan-loss reserves, or financial condition.

By the same token, borrowers and their investors are litigating vigorously, invoking a plethora of challenges, tactics and strategic delays throughout the judicial process. This may induce “lender fatigue”—the phenomenon by which a lender, “exhausted” from the costs and unpredictability of litigation, maintaining the collateral and regulatory oversight, will offer a borrower a favorable workout structure, or even a discounted repayment, in order to “stop the bleeding.”