Intercreditor Agreement
A legal agreement between two or more lenders that defines their respective rights, priorities, and remedies with respect to the same borrower or property. Intercreditor agreements are required when a capital stack includes both senior debt and subordinate financing such as mezzanine debt or a B-Note. Key provisions include standstill periods (restricting the junior lender from exercising remedies), cure rights (allowing the junior lender to cure senior defaults), and purchase options (allowing the junior lender to buy the senior position).
Related Terms
Mezzanine Debt
Subordinate financing that sits between senior debt and equity in the capital stack, secured by a pledge of ownership interests rather than a mortgage on the property. Mezzanine debt allows borrowers to achieve higher leverage (up to 85-90% of cost) while keeping the senior loan in compliance. Rates are higher than senior debt but lower than equity returns.
A/B Note Structure
A loan structure where a single mortgage is divided into two tranches: the A-Note (senior position with lower risk and lower yield) and the B-Note (subordinate position with higher risk and higher yield). The A-Note is typically sized at a lower LTV and sold to conservative investors, while the B-Note holder absorbs losses first and receives a higher return for that risk. A/B structures allow lenders to offer higher total leverage while distributing risk across different investor appetites. The B-Note holder often controls workout decisions in a default scenario.
Subordination
The contractual arrangement establishing the priority of claims between different creditors or capital providers in a real estate transaction. A subordinate lender agrees that their claim on the property's cash flows and collateral ranks below the senior lender's claim. Subordination is a fundamental concept in structuring the capital stack and directly impacts the risk and return profile of each position. The terms of subordination are documented in intercreditor or subordination agreements.
Senior Debt
The primary mortgage loan that has first priority claim on a property's cash flows and collateral. Senior debt sits at the top of the capital stack with the lowest risk and lowest cost of capital. Senior lenders are repaid before any subordinate financing or equity in case of default or sale.
More Deal Structure Terms
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