J. Dean Heller Published in The Practical Real Estate Lawyer
"Short Of Foreclosure: Less Drastic Remedies For The Real Estate Mezzanine Lender"

J. Dean Heller's article, "Short Of Foreclosure: Less Drastic Remedies For The Real Estate Mezzanine Lender," was published in the May 2010 issue of The Practical Real Estate Lawyer. In his article, Dean examines consensual remedies for a mezzanine lender and reasons why they should avoid foreclosure. Dean observes, "During the last decade, debt financing of larger commercial properties and portfolios of commercial properties has often been 'structured' to include (1) a direct mortgage loan to the property owner, usually a single-purpose entity created especially for the financing; and (2) one or more 'mezzanine loans' to a special purpose parent or grandparent of the property owner that is secured primarily, if not solely, by the mezzanine borrower’s direct or indirect equity interests in the property owner." He notes that the mezzanine lender usually gets "the first whiff of toxicity in an asset."

Dean explains, "The nature of such a financing structure usually limits the mezzanine lender’s legal remedy against its borrower to foreclosing on its equity collateral…. Unless the lender happens to have the experience and staff capable of handling the underlying real estate, or can arrange a quick and satisfactory sale, it must engage third parties to do what the borrower had been doing and, in many instances, those contractors will not be able to perform either as efficiently or effectively as a motivated borrower." He points out that for this reason alone, it often makes little sense for any lender to rush to foreclosure.

According to Dean, assuming an interested, able, and willing borrower and a reasonable hope that a substantial portion of the loan can be saved, the mezzanine lender has a number of measures, short of foreclosure, that it can take to improve its chances of recovery. He points out that "a mezzanine loan workout can work only where the underlying property remains capable of servicing at least the senior loan (or loans)." However, when it does not, and there is not a borrower group willing and able to carry the shortfall or other extraordinary circumstances, the mezzanine lender must seriously consider whether the property value, when and if it recovers, is realistic enough to justify its investment of time and money in a workout.