As I’ve noted previously [link to due diligence topics], one big difference between the current commercial real estate melt down and the last big one (in the late 80s) is the amount or level of “structure” in the deals. Like the last time, the debtorborrower side is “structured” (with a multi-tier borrower and perhaps even a “single purpose” entity); however, unlike the last time, the creditorlender side also is structured.

A multi-creditor structure greatly complicates decisions covering a possible workout, the remedies to be invoked, and the management, leasing and eventual sale of the collateral (after foreclosure).

Indeed, co-lender disagreements are the most difficult part of this process.  (And one lesson learned is to NOT do co-lender deals in the future; or do them only with similar lenders having similar balance sheets, ownership, investment objectives and criteria, etc.)

Part of the difficulty flows from some confusion, or misunderstanding, on the part of all of us on the technical terms and attributes of the co-lender structure. Since the typical co-lender structure either is a syndication or a participation, I’ve identified some of the basic terms for those two structures:

  • Nature of the creditor’s interest
  • Recover of taxes & funding losses; gross up for reserves
  • Common law rights
  • Insolvency of originator/agent
  • Legal opinions
  • Assignments
  • Enforcement actions
  • Amendment (workout) rights
  • Waiver rights
  • REO decisions (management, leasing & sales)

To help you better understand the difference between (i) a loan that has been syndicated (typically where each lender has its own note and all lenders share the collateral) and (ii) a loan that has been participated (where there is a single, lead lender, and the other lenders only participate without their own notes), here is list of some of the major topics of interest.

(For postings on other co-lender topics, such as AB Note structures and lender v lender litigation, search the site using the term "co-lender.") 

 (Click on "continue reading" for a table detailing differences on these terms)


Issue or Provision


Syndications (Agented/Multi-Lender
Credit Facility)

Nature of property interest

Participant is not a direct creditor of borrower.
Generally, structured as a sale of undivided interest in the rights of the originator.

Each lender is direct creditor of borrower.

Recover of taxes & funding losses; gross up for reserves

Loan documents generally do not permit participant to recover taxes and funding losses and gross up for reserve requirements and similar capital guidelines based on its actual exposure. Originator may have right to collect these amounts, but its exposure may not be the same as participant.

Loan documents generally provide that each lender can recover taxes and funding losses and gross up for reserve requirements and similar capital guidelines based on its actual exposure.

Common law rights

No debtor-creditor relationship between participant and borrower, so no common law rights of setoff held by participant. However, loan documents may provide for specific rights of the participants.

Each lender has traditional debtor-creditor relationship with borrower.

Insolvency of originator/agent

Depending on participation agreement, rights of participant may be impaired in insolvency of originator.
If originator is a regulated entity (insured bank, insurance company, etc) and has not complied with statutory or regulatory requirements as to documentation for the participation, the receiver of the insolvent originator may have defenses to enforcement of participation agreement.

Insolvency of administrative agent should not affect interest of each lender with respect to obligations of borrower to lender.

Legal opinions

Participant may not be able to rely on legal opinion (of borrower’s counsel) if the opinion either is not addressed to participant or does not state that participant can rely on it.

Generally, the opinion is for the express benefit of all lenders (in addition to the agent) and all lenders can rely on legal opinions.


Generally, participant cannot assign, sub-participate or encumber its interest.

Subject to any eligible assignee requirements, lender’s interest is generally assignable and can be participated and encumbered.

Enforcement actions

Generally, participant has no right to cause the originator to enforce remedies (although this can be addressed in the participation/servicing agreement).

Generally, lender (either alone or with other “required lenders”) can cause agent to enforce remedies; subject, of course, to an limitations of the documents.

Amendment (workout) rights

Most participation agreements allow participant to only prevent amendments that affect certain “sacred rights,” such as interest rate and payment dates.

Generally, lender (either alone or with other “required lenders”) can cause or prevent amendments to any provision of loan documents.

Waiver rights

Most participation agreements allow participant to only prevent waiver of material rights, such as payment defaults.

Generally, lender (either alone or with other “required lenders”) consent is required for any waiver.

REO decisions

Many participation agreements are silent on participant rights relating to REO decisions. The participation agreement needs to be closely reviewed for this issue

Generally, the agent has authority (under the co-lender provisions) to manage, lease & complete REO; however, “major” decisions (such as large leases and sales) typically require the consent of the “required lenders.”



Of course, all of these topics should be covered by the co-lender agreements; and the list is not exhaustive, nor it is all-inclusive. So, read the co-lender provisions or agreement.

If you have a “war story” about co-lender deals, or other provisions to add to my list, please post a comment.



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