Moody's Approach to Rating Commercial Real Estate Mezzanine Loans

In March, 2007, Moody's released their rating methodology for Mezzanine Loans: Moody's Approach to Rating Commercial Real Estate Mezzanine Loans.

This report outlines Moody's view of a baseline, "credit neutral" mezzanine loan structure and how they apply that view in rating mezzanine loans.


Baseline Expectations:

• Mezzanine Loan Agreement - comparable to CRE mortgage loan agreement.
• Underwriting - same third party deliverables as a mortgage loan
• SPE - Borrowers should be special purpose, bankruptcy remote entities. They should have independent directors and non-consolidation opinions at the same thresholds that apply to REMICs.
• Pledge of 100% membership
• Recourse Carve-out Guaranties
  
• Cash Management - hard lockbox
• Maturity - same date as mortgage loan
• Certificated entities - opt-in to Article 8 of the UCC
  
• Title Insurance - ALTA 16 Mezzanine financing endorsement
  
• Intercreditor agreement - expects the 2002 CMSA form of agreement
  
• Interest Rate Caps