As the delinquency rate for U.S. commercial mortgage-backed securities reaches record highs,1 restructurings and foreclosures of distressed real estate loans are becoming increasingly important components of the real estate practice. Where those loans form part of a capital structure that combines mortgage debt and one or more tranches of mezzanine debt, it is important for lenders at all levels of the capital structure to be mindful of the limitations and protections contained in intercreditor agreements. This article briefly describes certain of the key provisions in such agreements.

Acknowledgement of Separateness of Loans. Although mortgage and mezzanine lenders frequently have recourse to certain shared collateral (most often, “nonrecourse carveout” guaranties from a common guarantor), the structure is designed to provide mortgage lenders and lenders of each tranche of mezzanine debt with separate collateral for their respective loans. (For securitized mortgage loans, this separateness is critical to obtaining the requisite blessing of the rating agencies.) Accordingly, each lender generally acknowledges in the intercreditor agreement that it does not (and will never) have a claim against the borrower under any other loan in the capital structure or a security interest in the separate collateral securing any other such loan, and that each of the other lenders is entitled (subject to certain rights and restrictions which are described below) to exercise remedies with respect to its separate collateral.

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