Hedge funds and private equity firms gave loans. Now they're suing. - Press "Enter" to skip to content

Hedge funds and private equity firms gave loans. Now they’re suing.

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With the delinquency rate on large commercial loans tied to real estate in the United States nearly doubling in just one month, big banks, which are among the largest real estate lenders, have been generally willing to give property owners time to work things out with tenants. A class of smaller lenders are showing their impatience.

These lenders, which include hedge funds and private equity firms, have provided billions of dollars in so-called mezzanine financing to help owners of hotels, retail complexes and office buildings run their businesses.

Already, there have been a few high-profile battles. In May, after the Mark Hotel, one of Manhattan’s most luxurious hotels, missed several payments, a California private equity firm moved to foreclose on its $35 million mezzanine loan. A New York judge blocked the attempt, claiming the action was not justified and not “commercially reasonable” during a pandemic.

Unlike traditional mortgage lenders, whose loans are secured by the real estate, mezzanine lenders make loans that can convert into an equity interest in the business if the owner is unable to pay the mortgage, rather than the property itself. So “mezz” lending, which typically pays high interest rates, is both riskier and more rewarding for investors.

A foreclosure is a way for a mezzanine lender to recoup potential losses by arranging for a sale or auction of a delinquent loan as well as its equity interest in a borrower’s business. If no bidder emerges, the mezzanine lender can oust the borrower and take over as the property owner or developer. Judges have tended to side with mezzanine lenders in foreclosure disputes, but the pandemic has prompted some judges to be more sympathetic to financially stressed borrowers.

The New York court rulings on whether it is appropriate for mezzanine lenders to foreclose on borrowers during the pandemic are particularly important because New York law is often pivotal in resolving disputes between lenders and borrowers.


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