Wednesday, June 20, 2007

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

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