Train wrecks draw a crowd.  Look at this old film from the 1913 California State Fair (click the text).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unfortunately, many co-lender structures (secured by distressed commercial real estate) look exactly like this train wreck.
 
 
 
Why?
  • Some lenders used a co-lender agreement without considering the basic nature or perspective of the agreement – whether the form was “pro-buyer” or “pro-seller”
 
Co-lender agreements contain different approaches and terms depending upon the perspective or desired result of the party with the negotiating leverage.  On numerous, fundamental topics, a pro-buyer agreement heads in a different direction than a pro-seller agreement.
 
 
 
Each type of agreement (or different perspective) is a different train track. By not recognizing that a different colender agreement should be used if you were selling or buying interests in a loan, some lenders simply boarded the first train (i.e., the first or only form in the file) without asking the conductor (i.e., a lawyer or someone with some expertise) “where “the train was headed.
 
 
 
Sure, there were pressures at the turnstile to quickly buy the loan.  We all heard the “if you don’t buy, there’s a long list of people behind you who will buy.”
 
 
But I’m focused on sellers who used the wrong form.  Lenders who took the attitude of “I use this form when I buy, so it should be acceptable to my buyers.  I need to quickly sell this loan interest.”
 
 
This is an untold subplot of our larger CREF liquidity pile up.  It is the tangled mess of many commercial real estate, colender structures (from participations to syndications of the loan).
 
 
It is part of the answer to these questions:
  • Why is the colender group having so many problems in making decisions when the loan is under distress?
  • Why the delay, from the co-lender side, in resolving a distressed loan when the borrower has a perfectly acceptable solution?

The delay might be more basic than lenders with different balance sheets and different regulatory environments. Some lenders treated the colender agreement as if it was a LSTA form (which are used in trading loans not secured by commercial real estate). Unfortunately, LSTA standardization does NOT exist in the world of commercial real estate finance.  There is no recognized “one size fits all” form of co-lender agreement in commercial real estate finance. Yes, this one falls into the “lessons learned” category. But unless and until you bake this lesson into the core knowledge base and process of your organization, the train wreck will be repeated at the next commercial real estate downturn. If not, we’ll all stand around and watch the train wreck. If you have a comment or a story to share with us, please post it below.