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

During the past decade, borrowers accessed subordinate debt by obtaining mezzanine loans-financing secured by pledges of the ownership interests in an entity that owned real property, rather than by the real property itself. The relationship of the mezzanine lender to the mortgage provider, and the mezz lender’s rights in that relationship, are governed by an intercreditor agreement. This is often a major factor in the potential success or failure of the loan. The greater the array of rights granted by the senior lender to the mezzanine lender, the greater the value of the mezzanine loan. As we will see, the position of a mezzanine provider under an intercreditor agreement often is not a winning one.

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