Lender Defaults: The New Reality Facing Real Estate Debt Investors

Abstract

Investors in real estate debt are facing a new reality. They must focus not only on the viability of the real estate project and the financial stability of the borrower, but also on the creditworthiness, liquidity, and stability of the holders of other interests in the debt capital structure, including senior and junior loan holders, co-lenders, and holders of participation interests. Investor concerns about counterparty default risk are amplified by the multi-layered and complex capital structures that were created during the real estate boom years and the variety of different institutions often present in an existing loan structure, such as foreign and domestic commercial banks, investment banks, life insurance companies, institutionally managed commingled real estate or private equity funds, and hedge funds. As a starting point, investors should understand the rights, obligations, and remedies under the loan documents, including documents governing the counterparty relationship (such as co-lender, inter-creditor, or participation agreements) and appreciate the counterparty risks that may exist in each investment opportunity.