Intercreditor
Subordinations
Intercreditor subordinations
have become much more complicated than the simple "title company forms"
of lien subordination. It is now common for lenders to negotiate detailed
terms relating to payment priorities or payment freezes, the ability
of one lender to require the other lender to continue disbursements,
the ability of one lender to require the other lender to release collateral,
limitations or standstills on default remedies, special rights in foreclosure
or bankruptcy, and a variety of other matters. Because of our experience
on hundreds of deals with multiple lenders, we know all other ropes
of intercreditor subordinations. It is a popular topic with our lender
clients in our WorkSmart Seminars™.
Master
Planned Communities
If you make construction
loans to home or apartment builders who are building out portions of
a master planned community, you may face additional risks that are not
easily understood. For instance, developers of such communities often
impose certain development covenants that require achievement of certain
construction milestones by certain deadlines, require profit participation
between the master developer and the builder, and require payment of
master marketing fees and other community enhancement fees, often from
sales proceeds. Any or all of these obligations may be secured by a
deed of trust that needs to be subordinated, or may constitute a covenant
running with the land that can interfere with your rights as a lender.
Moreover, the master
developer may also have encumbered the property with a repurchase option
that can be triggered by any of several events. Almost always the terms
of such option, including the triggering events and the price for exercise
of the option, pose a serious threat to your security, and may impose
an artificial ceiling on the value of your collateral.
These are subtle
and tricky arrangements, and we have seen instances where lenders were
wholly unaware of the risks presented by these arrangements. Because
of our experience with lenders who operate in southern California communities,
where these arrangements originated, we now have extensive experience
in analyzing these arrangements and helping lenders negotiate terms
under which the master developer subordinates or limits its rights so
that you will not be damaged.
