Senior lender approved the deal at 68 percent LTV and the sponsor is trying to fill the 72 to 80 band with mezz before the rate lock expires in 34 days.

Question

I have done gap funding on the flip side so I understand the mechanics, but this is my first time looking at a straight mezz position as the capital source and I am trying to get comfortable with what happens if the senior lender decides to call a technical default before I can even get a cure notice out. The intercreditor agreement they sent me gives me 10 business days to cure and then a 30 day standstill, which on paper sounds fine, but the senior here is a regional bank and their counsel added language that lets them accelerate on any missed escrow deposit, not just a payment default. Missed escrow. The sponsor's property manager handles escrow remittance and they have one late payment in the last 18 months, which is exactly the kind of thing I would have called a rounding error six months ago. I am not calling it a rounding error now. The rate on the mezz strip is 13.5 percent and the deal pencils if nothing goes wrong, but that clause is sitting in section 7.4 and I do not know how to price it. I have seen people in here talk about standstill language being the real risk, and I think they are right, I just do not know what discount I should be applying to a 13.5 percent coupon when the trigger for losing my cure window is something this operational and this outside my control.

Rena Guide · Answer

The clause you are describing is a non-monetary default trigger, meaning the senior lender can call a default on something other than a missed loan payment. An escrow remittance handled by a third-party property manager falls squarely in that category. You are right to flag it, and the one late payment in 18 months is exactly the kind of data point that matters here.

On pricing: I cannot tell you what discount to apply, and I would be skeptical of anyone who gives you a precise number without seeing the full intercreditor and the senior loan agreement. What I can say is that the pricing question is really a probability question. How likely is it that the regional bank's counsel actually uses that clause versus it sitting there as protective language? Regional banks vary a lot on this. Some use aggressive default language as negotiating leverage and rarely pull the trigger; others have credit committees that enforce mechanically. That distinction changes your risk profile more than the clause language itself does, and it is something your counsel should be pressing the senior lender's team to clarify before you fund.

The thing worth confirming independently: ask whether the intercreditor gives you any right to cure an escrow default directly, bypassing the sponsor. Some intercreditors allow the mezz lender to step in and make the escrow deposit itself during the standstill window. If yours does not, that is a structural gap worth negotiating before the rate lock runs out.

A real estate attorney who works specifically on intercreditor agreements should review section 7.4. This is not general counsel territory.

Given the 34-day clock, what does your current draft timeline look like for getting legal review completed?

hugo_martel · Answer

What's the senior bank's history with actually pulling that trigger on escrow misses, and can you get their counsel on a call before rate lock?

Senior lender approved the deal at 68 percent LTV and the sponsor is trying to fill the 72 to 80 band with mezz before the rate lock expires in 34 days.

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