This template is an intercreditor agreement in the context of a mezzanine financing transaction in New York. It is intended to serve as a general drafting aid and will need to be modified according to the specific circumstances of the transaction and the intentions of the parties. This template includes practical guidance, drafting notes, and optional clauses. Transactions Involving a Mezzanine Loan and Senior Mortgage Loan A mezzanine loan is a type of subordinate loan that is indirectly, rather than directly, secured by real property. Unlike a senior mortgage loan (referenced herein as a senior loan), which is secured directly by real property, a mezzanine loan is secured by a pledge of equity interests in the entity that owns real property that is encumbered by the senior lender's mortgage. The performance of both the senior loan and the mezzanine loan thus depends on the income from the underlying real property. From the mezzanine borrower's perspective, mezzanine loans are a means of obtaining additional financing that is typically not available based on traditional mortgage-based financing alone. The parties to a transaction involving a mezzanine loan and senior loan are as follows: • The senior mortgage borrower (referenced herein as the senior borrower), which is the entity that directly owns the real property (e.g., an office building, hotel, or retail shopping center) that will typically be used as collateral to finance a senior loan at or around the time that the parties enter into the mezzanine loan transaction • The mezzanine borrower, which is the entity that directly owns the equity interests in the senior borrower, and which grants a security interest in those equity interests and other collateral to the mezzanine lender in exchange for mezzanine loan funds • The mezzanine lender, which makes a loan to the mezzanine borrower that is secured by the mezzanine borrower's pledge of the equity interests in the senior borrower that the mezzanine borrower owns • The senior mortgage lender (referenced herein as the senior lender), which provides a loan to the senior borrower that is secured by the real property that such senior borrower directly owns The senior loan documents and the mezzanine loan documents will often be substantially similar to one another with respect to the rights and obligations of the respective borrowers. Those loan documents themselves, however, will rarely address the rights of the lenders with respect to one another. Among such other rights, the mezzanine lender is typically concerned about a potential foreclosure on the real estate by the senior lender. The senior lender is often concerned about the creditworthiness of the mezzanine lender. That is of particular concern in the event that the mezzanine lender forecloses on the senior borrower's equity interests owned by the mezzanine borrower, thereby taking control of the senior borrower and the operation of the mortgaged premises. For the foregoing reasons, an intercreditor agreement, which is a separate contractual agreement by and between the two lenders, is necessary. Intercreditor Agreement An intercreditor agreement governs the relationship between the senior loan and mezzanine loan. Intercreditor agreements are highly negotiated in that context as two forces (senior and mezzanine lenders) vie for protection of their own self-interest and return on investment. Accordingly, a "market" or standard intercreditor agreement does not exist. As to the relationship between the senior and mezzanine loan, the key premise of the intercreditor agreement from the senior lender's perspective is to effectuate the full subordination of the mezzanine loan. Therefore, the intercreditor agreement generally provides for payment of the senior lender's debt in full prior to payment of the mezzanine lender's debt, except as specifically otherwise provided in the intercreditor agreement. At the same time, however, the intercreditor agreement allows the mezzanine lender to preserve the value of its collateral in the context of such subordination, for example, by receiving mezzanine debt service payments in the normal course. The intercreditor agreement also defines the rights and obligations of the respective lenders. In that context, the senior lender and mezzanine lender frequently engage in extensive negotiations, as each lender maneuvers to establish its respective rights and remedies. Such negotiations involve each of the following noteworthy concepts, among other concepts: • Senior loan foreclosure. In the event of a senior loan foreclosure, the intercreditor agreement typically includes various protections for the mezzanine lender that allow it to preserve the value of its collateral, including the following protections that the parties will negotiate: o The right to receive notices from the senior lender, such as senior loan notices of default o Cure rights, whereby the senior lender agrees under certain circumstances not to enforce its mortgage and to accept a cure from the mezzanine lender of any monetary or nonmonetary defaults under the senior loan documents o A purchase option, effectively giving the mezzanine lender the right to pay off the senior loan upon an event of default thereunder • Mezzanine loan foreclosure. In the event of a mezzanine loan foreclosure, this agreement includes various protections for the senior lender that allow it to preserve the value of its collateral, including the following protections that the parties will negotiate: o The senior lender's right to require that the mezzanine lender cure all defaults under the senior loan and deliver a supplemental guaranty and other documents from the mezzanine lender or other party that will assume control of the premises post-foreclosure, among other requirements o If the mezzanine lender seeks to obtain a recovery from a mezzanine loan guarantor, the senior lender's right to require that the mezzanine lender subordinate its claims against any mezzanine loan guarantors that are also guarantors as to the senior loan • Transfer provisions. The intercreditor agreement typically provides for terms regarding the transfer of the mezzanine loan and senior loan, including the following negotiable terms: o Regarding the mezzanine loan, transfer restrictions on such loan to ensure that only creditworthy parties (qualified transferees or other parties satisfying similar financial requirements) take direct transfer of the mezzanine loan, or provide the mezzanine lender with a credit facility secured by the mezzanine loan o Regarding the senior loan, the senior lender's right to freely transfer such loan (1) to another direct lender or (2) to a party that will securitize such loan, for instance, as part of a commercial mortgaged-backed securities ("CMBS") transaction Finally, as a subordination agreement, the intercreditor agreement typically is enforceable under its express terms against the lenders in a bankruptcy proceeding in which the senior borrower or mezzanine borrower is a debtor—to the same extent that it is enforceable under applicable non-bankruptcy law. See 11 U.S.C. § 510(a). Related Content For a full listing of key content covering intercreditor agreeements, see Intercreditor Agreements Resource Kit. For a full listing of key content covering mezzanine financing, see Mezzanine Financing Resource Kit. For a full listing of key content covering intercreditor agreements, see Intercreditor Agreements Resource Kit. For a discussion of issues that typically arise in connection with mezzanine financing transactions, including those related to structuring the transaction, see Mezzanine Financing and Mezzanine Debt Structure. For a diagram of the parties involved in such a transaction, see Mezzanine Loan Structure Diagram (Real Estate Transaction). For templates in the context of a mezzanine loan transaction in New York, see Loan and Security Agreement (Mezzanine Financing) (NY) and Pledge and Security Agreement (Mezzanine Financing) (NY). For a discussion of intercreditor agreements in a mezzanine financing context, see Intercreditor Agreements (Mortgage Lender and Mezzanine Lender). For information regarding intercreditor agreements, generally, see Intercreditor Agreements. For a checklist of issues arising in an intercreditor agreement in a general context, see Intercreditor and Subordination Agreements Checklist. For a general overview of loan subordination issues, see Structuring a Financing Transaction and Lien Subordination versus Debt Subordination. For a template of a New York intercreditor and subordination agreement in the context of a mezzanine loan and a senior loan that is a revolving loan (and thus not a mortgage loan), see Intercreditor and Subordination Agreement (Mezzanine Financing) (NY).