Real estate investment finance commonly uses structural subordination (senior/mezzanine structure), where each obligor is increasingly removed from the properties.
A single-currency fixed-term senior loan facility agreement with either a fixed or a floating rate of interest is made between the “Finance Parties” and the Company and the Borrowers. It is advanced to each Borrowers to acquire each individual Property.
If mezzanine debt is provided in the financing transaction, it is both structurally and contractually subordinated to the senior debt. It is structurally subordinated such that the holding company (HoldCo) of the property-owning SPV (the PropCo) is the borrower of the mezzanine debt.
The senior loan (Facility A/Tla) is advanced to the property-owning companies (PropCos) as "Borrowers" and the mezzanine loan is advanced to their holding company (HoldCo) as the "Company" pursuant to a separate loan facility agreement.
The HoldCo is higher in the corporate structure than the PropCos, which are subsidiaries of HoldCo. The HoldCo shareholder is higher in the corporate structure than the HoldCo, each with increasing removal from the assets held by the PropCos.
Without any overriding contractual agreement, HoldCo has recourse only to the shares in its subsidiaries (PropCos) and a residual claim to their assets (“Properties”) after all Company creditors. In the event additional finance is provided to HoldCo, it is subordinate to the claims of the senior lenders.
Security over subordinated debt is taken to facilitate the sale of the shareholder’s shares on enforcement against an obligor. Lenders have the full recourse and cross-collateralized guarantee of the shareholder of HoldCo, HoldCo and each PropCo.
Where property is located in Scotland, a “Standard Security” and an “Assignation of Rent” (Scots-law security documents) may also be of relevance.