Subordinate financing for real estate has been around for aslong as borrowers have desired to increase their leverage.Historically, such funding was secured in the same way as seniorfinancing with a mortgage that was similar but junior to the seniormortgage. However, with the advent of structured finance, lendersbecame sensitized to the perils that second mortgages posed to thesecured senior position.

During the past decade, borrowers accessed subordinate debt byobtaining mezzanine loans-financing secured by pledges of theownership interests in an entity that owned real property, ratherthan by the real property itself. The relationship of the mezzaninelender to the mortgage provider, and the mezz lender's rights inthat relationship, are governed by an intercreditor agreement. Thisis often a major factor in the potential success or failure of theloan. The greater the array of rights granted by the senior lenderto the mezzanine lender, the greater the value of the mezzanineloan. As we will see, the position of a mezzanine provider under anintercreditor agreement often is not a winning one.

If senior lenders had their choice, they would not enter into anintercreditor agreement with the mezzanine lender. However, in2002, what is now the Commercial Real Estate Finance Councilintroduced a form of mezzanine intercreditor agreement for use inall securitized mortgage loans. While the standard intercreditoragreement attempts to reach a middle ground, it often results in athe mezzanine lender not having any significant or practicalrights.