Mezzanine Foreclosure in Real Estate Finance: UCC Article 9, Mortgage and Intercreditor Constraints, Threshold Issues

Mezzanine loans have become the preferred vehicle for subordinate financing in real estate transactions. The repayment obligation is typically secured by a perfected UCC security interest in the mortgage borrower's equity interests. Counsel should have a thorough understanding of how the foreclosure remedy is exercised under Article 9 and the mezzanine foreclosure ramifications for the mortgage borrower, mortgage lender, and other parties to the transaction.

Before commencing foreclosure, the mezzanine lender must review all relevant transaction documents, including UCC insurance policies. If the debtor "opted into" Article 8, the lender must locate the certificate. Counsel must understand the mortgage lender's rights and the rights of any senior mezzanine lenders, ground lessors, or other parties with interest in the underlying property. An intercreditor agreement will likely provide the most significant input into the timing and nature of remedies vis a vis other lenders.

Article 9 provides that a public sale must be conducted in a "commercially reasonable" manner, with advance notice to all relevant parties under Sections 9-611 and 9-612. The public must have a "meaningful opportunity" for competitive bidding, requiring some form of advertisement or public notice preceding the sale. The location and manner of the sale should be appropriate to allow for public access to the disposition. Also, counsel should review any recent case law construing what constitutes "commercially reasonable" to ensure compliance with any local standards at the time of the sale.

The mortgage may limit the transfer of ownership interests in the mortgage borrower to a "qualified transferee," generally defined as either the mezzanine lender itself or an institutional investor meeting specific requirements. This significantly restricts the potential universe of purchasers at a foreclosure sale, and the process of "qualifying" the winning bidder may inject uncertainty surrounding the ability of a buyer to close.

Listen as our authoritative panel analyzes these and other issues associated with mezzanine foreclosure under the UCC.