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
