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INTERCREDITOR AGREEMENTS AND CONSORTIUM LENDING © Joseph Philip Forte Thacher Proffitt & Wood

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Page 1: INTERCREDITOR AGREEMENTS AND CONSORTIUM LENDING - c.ymcdn.com · Structuring Participations in Real Estate Loans Points to consider in attempting to define and balance the competing

INTERCREDITOR AGREEMENTS

AND

CONSORTIUM LENDING

© Joseph Philip Forte Thacher Proffitt & Wood

Page 2: INTERCREDITOR AGREEMENTS AND CONSORTIUM LENDING - c.ymcdn.com · Structuring Participations in Real Estate Loans Points to consider in attempting to define and balance the competing

Structuring Participations in Real Estate Loans Points to consider in attempting to define and balance the competing interests.

Daniel J. Driscoll and Joseph Philip Forte

The buying and selling of participation interests in mortgage loans has become commonplace, particularly among financial institutions and other institutional investors. The parties to these transactions may have very different interests that must be protected by a carefully crafted participation agreement. In outlining some of the basic provisions usually contained in such agreements, this article explores some of the conflicts that might be encountered and how they might be resolved.

For decades, participation transactions have been recognized by statute as appropriate investment vehicles for most supervised financial institutions. While different legislatures may have had different reasons for permitting participation transactions, their place in the investment strategy of financial institutions is now well-settled.

Historically, participation transactions have taken a variety of forms, involving single loans, small groups of loans or large loan pools; con-struction as well as permanent loans; loan sale transactions; and secured extensions of credit, such as warehousing lines. The participation arrangement is equally available for new origi-nations and seasoned loans held in portfolio. As an investment vehicle, the participation can be structured to effectuate almost any economic or other investment goal.

Daniell. Driscoll and loseph Philip Forte are Partners in the law firm of Thacher Proffitt & Wood in New York City, specializing in real estate and mortgage finance.

Vol. 4. No.1, Spring 1987

The Advantages

A participation arrangement provides the par-ties with a single means to accomplish several different ends, such as:

• developing correspondent lender relations; • improving liquidity; • diversifying geographic risk; • complying with legal lending limits; • permitting the originating lender to retain the

customer relationship; • spreading the underwriting risk; or • allowing an out-of-state investor to comply

with or avoid the impact of local laws relating to "doing business" and taxation.

Yet, the relationship between the parties to a participation arrangement can be adjusted to the advantage of each. For example, the originating lender can subordinate its partial interest in the loan:

• to provide credit support over the term of a

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loan or on a short-term basis (e.g., rental ach ievement);

• as further assurance for the originati ng lender's underwriting; and

• to achieve an acceptable loan-ta-value ratio for the participants by establishing in the participation arrangement first and second loan positions.

The Structure

A true loan participation (as opposed to a joint loan' or an extension of credit) is a shared loan created by a contract (a "participation agreement"). Under this agreement, a lender, usually a financial institution (the "lead lender") divides a single loan2 (which it holds in portfolio or is in the process of originating) into sepa-rate, undivided, partial percentage ownership interests ("participation interests"). The lead lender then sells the participation interests to other lenders, usually financial institutions ("participants"), and retains a participation inter-est for its own account ("retained interest").3

If the participation agreement is properly drafted, the lead lender and each participant have a participation interest in the loan, the loan documents, the collateral security, and all proceeds and payments on accou nt of the loan. 4 Participation interests are usually held pari passu by the parties, i.e., loan proceeds are distributed ratably among them.

In many cases, the loan that is subject to the participation agreement will have been under-written, originated and closed by the lead lender, and all documents will name the lead lender as the lender. In addition, the mortgage will be recorded in the lead lender's name, and the loan documents and any collateral will remain in its possession.

At the time the lead lender sells a participa-tion interest in a loan, it will issue a "participa-tion certificate" to e~ch participant, evidencing that party's ownership of an interest in the loan. Third parties, however, generally will be un-aware that any participation interests have been sold. Customarily, the participation agreement does not oblige the lead lender to disclose such a sale to the borrower or on the public record; rather the lead lender notes or marks the sale of a partici pat ion interest on its books and records.

After a participation certificate has been issued, the participant may transfer its interest

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in the loan by assigning its participation inter-est, transferring the participation certificate, and notifying the lead lender of the sale. In some instances, however, the participation agreement may expressly state that such trans-fers are void without the lead lender's consent.

When a participation interest is sold, the borrower's indebtedness to the lead lender is reduced on that lender's books, while the books of the purchasing participant reflect a loan to the borrower to the extent of its participation interest (despite the fact the borrower continues to believe it is indebted only to the lead lender). Absent knowledge or notice of a participant's "equitable" beneficial ownership interest in the loan, the borrower continues to deal solely with the lead lender and (as is the case with any other third party) continues to rely on the lead lender's apparent sole ownershi p of the loan.s Consequently, the lead lender is solely responsible to the borrower for the safekeeping and return of the collateral.

Any participation transaction, then, actually involves two transactions: (i) the loan contract between the lead lender and the borrower, which controls the terms of the loan, and (ii) the participation agreement between the lead lender and the participant, which controls the ownership of the loan.1i

The reiationship between the parties to a participation arrangement can be adjusted to the advantage of each.

The Relationship Between the Parties

The participation agreement establishes the relationship between the lead lender and the participant-as that of seller/purchaser or debtor/creditor. The agreement also covers:

• representations and warranties of the lead lender with respect to the loan;7

• covenants and obligations of the lead lender respecting routine loan administration;

• the handling and distribution of funds; • the protection of collateral security; • the possession of loan documentation;8 • the lead lender's compensation;

Real Estate Finance

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• reimbursement of the lead lender for pro-tective advances;

• the rights of the participant to terminate the lead lender as servicer; and

• the rights of the participant in the event of the lead lender's insolvency.

The participation agreement also controls the degree to which the lead lender is required to consult with the participant; what consents will be req u ired; the settl ement of disputes between the parties; the lead lender's ability to act on its own in the case of an emergency; and how major servicing decisions will be made. More specifically, such servicing decisions would involve:

• the extension of loan maturity; • forbearance; • release of collateral or guarantors; • the approval of leases; • consents to subordinate financing and the

sale of mortgaged property; • the granting of non-disturbance agreements; • the use of hazard insurance or condemna-

tion proceeds; • the acceleration of the loan or commence-

ment of foreclosure; • the acquisition of foreclosed property; and • the management of real estate owned

("REO") and the ultimate sale of REO.

Perhaps the most sensitive points are those defining the lead lender's standard of care in servicing the loan on behalf of the participant;9 termination of the lead lender, as servicer, with-out cause;lO waiver of bankers' liens or rights in unrelated collateral; and a covenant by the lead lender not to be influenced in its servicing decisions as a result of other relationships with the borrower.11

Investor Requirements

Notwithstanding the menu of possible provi-sions, there are no hard and fast rules or gener-ally accepted customs and usage for the relative allocation of rights and obligations in a particular transaction. The two extremes are represented by (i) the United States Savings and Loan League's recommended participation agreement form, which for the most part gives complete control to the lead lender, 12 and (ii) the position taken by major institutional investors (such as life insurance companies), which requires that

Vol. 4, No.1, Spring 1987

they make all decisions as participant. Full con-sultation and approval rights between the lead lender and the participant would be a satisfactory middle ground, but can usually be obtained only where the interests of the parties are approx-imately equal.

How these positions are reflected in any par-ticular participation agreement depends on a number of factors, including:

• the relative strength of the parties; • the size and quality of the loan; • the identity of the participant; • the type of loan; • the geographic proximity of each party to the

property; • the relative percentage interest of each party

to the loan; • market conditions; and • whether there is more than one participant.

The introduction of the lead lender's subordi-nation of its retained interest (the "junior interest") to that of the participant (the "senior interest") further complicates this equation.

Insolvency Considerations

In recent years, investors have had to contend with the problem of recovering their investments from failing financial institutions that have acted as lead lender in loan participation arrangements. While Section 541(d) of the federal Bankruptcy Code (the "Bankruptcy Code")13 protects a participant's participation interest vis-a-vis a lead lender that is subject to the Bankruptcy Code, a different situation arises in the case of a lead lender that is a financial institution subject to federal or state supervisory liquidation. In these situations, although not bound by the participant protection provisions of the Bankruptcy Code, the Federal Savings and Loan Insurance Corporation ("FSLlC") has conformed with those provisions in its conduct of supervisory liquidations of failing lead lenders that are federally chartered thrifts.

On the other hand, the Federal Deposit Insur-ance Corporation ("FDIC"), which supervises and insures (and Iiquidates)14 banks and some non-FSLlC-insured thrifts, has not followed the FSLlC approach. Instead, it endeavors to protect its insurance fund first. In fact, in a recent Penn Square-related case, the FDIC asserted a borrower's right to set off an insured deposit in

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the failed lead lender bank against that borrower's debt to the bank, in an amount in excess of the lender's retained interest in the loan.15 This would, of course, prevent the par-ticipant from recovering its full investment from the borrower; instead, the participant would be classified as a general creditor of the lead lender.

It is therefore critical that an investor deter-mine at the outset the identity of the lead lender to establish the extent to which it must protect itself against that institution's supervisory prob-lems. Of course, this will dictate the protective provisions that a prudent participant will require as a condition to investing in certain participation arrangements.1

£>

In many cas~s, the lead lender may be more wiiling to " 11' I' aCCOmmOGale a , .... erau t]ng borrovver.

Balancing Perspectives

I n negotiating the relative rights of the parties, one must consider the potentially adverse positions of the lead lender and the participant in the event a borrower defaults. I n many cases, the lead lender may be more willing to accom-modate a defaulting borrower, due to its rela-tionship with that borrower or its desire to avoid adverse publicity in the local community. Fur-thermore, while the lead lender and the partici-pant both desire to maximize the return on their investment, they may differ on how best to do so.

These differences will be magnified in arrangements involving senior/junior participation interests. Typically in such cases, the lead lender holding the junior interest will ask for the right to receive notices of default and an opportunity to cure the defaults, viewing its position as essentially equivalent to that of a second mort-gagee. In second mortgage situations, the sec-ond mortgagee would prefer to acquire the mortgaged property by foreclosure and keep the first mortgage current.

On the otrer hand, the participantwiJI expect to obtain one of two institutional positions regarding a junior lien: (i) it may require the second mortgagee to guarantee the borrower's

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performance, in which case it will permit the second mortgagee to perform on behalf of the borrower; or, (ii) taking the position that the second mortgage is similar to equity, it may require that the second mortgagee either buy the first mortgage or prepay it in fullY

Senior/Junior Participations

While subordination is generally understood to confer inferior legal rights to the holder of the junior interest, the scope or depth of that subor-dination in any particular transaction is a matter of negotiation. The lead lender's subordination of its retained interest is commonly understood to mean that the holders of the senior interests are to be paid in full prior to any payments to the holder of the junior interest upon liquidation of the collateral. This is commonly known as "lien subordination" (and not "payment subordination") because principal and interest payments are distributed to the holders of the senior interest and the junior interest pro rata during the term ofthe loan.18 (In the case of payment subordination, all payments on the loan would be applied first to the senior interest until it is paid in full, and thereafter applied to the junior interest, in effect creating a "fast-pay, slow-pay" participation.)

Even in what is otherwise a "lien subordina-tion" transaction, a "modified-payment subor-dination" has been used occasionally in the context of a bankruptcy of a borrower. The loan that is the subject of the participation is a single first mortgage loan in the eyes of the borrower and third parties. Consequently, payments are made by the borrower without regard to the contract rights of the lead lender and the par-ticipant. During the course of, or as a result of, a borrower's bankruptcy, scheduled payments on the loan may be reduced or deferred, or the principal balance of the loan may be reduced to an amount equal to the current market value of the mortgaged property. Participation agree-ments occasionally have provided that under these circumstances all payments on the loan are to be applied first to the senior interests, until these are fully repaid, and then to the junior interest, or that any reduction in principal is first to be applied against the junior interest.

In certain situations, the lead lender's subor-dination of its retained interest is perceived as

Real Estate Finance

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enhancing the value of the senior interest. Thus, the interest rate paid to the lead lender under the junior interest is higher than that paid to the holder of the senior interest. This excess interest may be characterized as a subordination fee, a guarantee fee, or merely as a higher rate of interest to compensate for the greater riskY'

As noted above, the lead lender typically retains the servicing of the loan under a partici-pation agreement. If the lead lender subordinates its retained interest, the participant may argue that it, as first mortgagee, is the proper party to service the loan (assuming it is in a position to do so). In our experience, when the lead lender and not the loan itself is viewed as the credit risk, the participant's servicing of the loan has been a material business point. Conversely, if the participant intends to trade its participation interest actively on the secondary market, it is not practical for it to service the loan.

When the participant is the servicer, it does not assume any duty or obligation to the lead lender for any payments or collections on the loan other than to account for and pay over to the lead lender any sums in excess of that which it, as participant, is due. In the event of a default, the participant has the sole power and authority to declare the loan due and to institute foreclosure action. All advances and expenses incurred by the participant are added to the senior interest as priority items. The participant is under no duty or obligation to protect the junior interest or to collect any sums due the lead lender on its junior interest.

Regardless of which party services the loan, perhaps the most heavily negotiated provisions of a participation agreement are those relating to major servicing decisions. Absent fraud, collusion or an inter-creditor agreement, the holder of a first mortgage is under no duty or obligation (other than any statutory requirement to name the second mortgagee as a party defendant in the foreclosure action) to consult with or notify the holder of a second mortgage as to matters affecting only the first ~ortgage, such as forbearance, release of collateral and waiver of conditions. In a true participation arrangement, however, the actions on such servicing matters directly affect the investments of both the lead lender and the participant. Thus, in a junior/senior participation, these factors work in favor of the senior interest. As a compromise, Vol. 4, No.1, Spri ng 1987

the lead lender in some cases has been offered a right to purchase the senior interest if it dis-agrees with a major servicing decision made by the participant.

Other Possible Provisions Most of the discussion above 1as focused on

"typical" contract rights between a lead lender and a participant. Negotiations between the parties, however, may result in provisions con-cerning a number of other contingencies.

o The transfer or assignment of the loan in the event the senior interest is paid in full prior to the junior interest.

o The right of the lead lender to make advances to cure certain borrower defaults, such as the failure to maintain the property, to comply with the ground lease covenants, or to maintain the priority of the lien of the mortgage, whether the borrower's default affects either or both the senior or junior interests. To the extent such payments are made to the participant, the lead lender is usually subrogated to the participant's rights and remedies, subject however to the participant's other senior rights.

Perhaps the most heavily negotiated provisions are those relating to major servicing decisions.

o The right of the participant to acquire the property at a foreclosure sale as the highest bidder and to resell the property without accounting to the lead lender for the proceeds; except to the extent the price bid exceeds the monies owed to the participant.

o The right of the lead lender to submit bids at any foreclosure sale.

o The relative rights of the parties under circumstances where the lead lender and the participant concur that the better course of action is to acquire the property by deed-inlieu-of foreclosure in consideration for extinguishing the loan and satisfying the mortgage.20

o The waiver by the lead lender of any statute adopted for the benefit of second mortgagees or

junior participants, to the extent per27

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mitted by the public policy of the jurisdiction. For example, Section 1315 of the New York Real Property Action and Proceedings Law grants a junior participant the right to commence fore-closure of the mortgage in its entirety (or, in the alternative, the junior interest only, subject to the senior interest) in situations where the par-ticipation agreement gives the holder of the senior interest the right to commence foreclo-sure, but it refuses to do so.

D The requirement that the lead lender deliver a satisfaction or assignment of its retained interest to the participant upon the satisfaction or termination of the retained interest so as to permit the participant to satisfy the mortgage of record.

D Upon default and the election of the par-ticipant not to commence foreclosure, the right of the lead lender to commence foreclosure of the retained interest21 and to acquire or sell the pruperty subject to the participation interest as though that interest were a separate and distinct first mortgage, without prejudice or impairment of the participant's rights as the holder of the senior position.

Conclusion

As the secondary market expands in the com-mercial real estate area, an appreciation of the basic tensions in the participation relationship will be critical to understanding the negotiating position and tactics to be employed in more complex structured transactions. The foregoing article is intended as an aid to understanding the conflicts and issues that ordinarily arise in the purchase and 'sale of participation interests in mortgage loans. Although the relative importance of each aspect of a particular arrangement will vary with the type of loan and the perspectives of the parties, we have attempted to highlight the most frequent obstacles to agreement. Nevertheless, there are other considerations that we have not specifically addressed (e.g., securities law and income tax issues), but that may arise in any participation transaction;

. these issues also should be considered in nego-tiating and drafting the documents.

Endnotes 1 In a joint loan or agent-bank agreement. each participating

lender receives a separate note from the borrower running directl, to it. The lead lender holds and administers the collateral as

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agent for all lenders. and services the loan. 2 Where more than one loan is the subject of the participation

agreement. each participant has a participation interest in each loan. In conventional construction loan participations. partici-pants have purchased specific construction loan advances. The specific construction loan advance structure has also been applied to the Government National Mortgage Association's ("GNMA") Construction loan Certificate ("ClC") program for FHA-insured project mortgage loans.

lThe recent development of a "100% participation" merely reflects a participation agreement whereby the lead lender has sold all participation interests in the subject loan to participants and retains mere legal title to the loan for the purposes of servicing. much like a trustee in a mortgage pass-through transaction.

4 A true participation is a sale by the lead lender and a purchase by the participant of a partial or fractional interest in the underlying loan. Many participation agreements go to great lengths to make it clear that each party owns a separate and distinct yet undivided interest in the loan, and specifically disclaim the formation of a partnership or joint venture with respect to the loan.

5 Since a true participation does not create a direct debtor-creditor relationship between the borrower and the participant. the participant may not exercise a right of set-1Jff against the borrower. Conversely. while the borrower could not exercise the right of set-1Jff against the participant. it would retain its right of set-1Jff against the lead lender.

6 Absent restrictive language in the loan documents. the lead lender may freely assign the loan and its rights thereunder without the borrower's consent. However. where the loan is not a negotiable instrument (or if the holder of a note that is not a negotiable instrument is not a holder in due course). the assignee takes the loan subject to the borrower's defenses and claims. I n a participation transaction. the participant will either rely on the lead lender's representation in this regard or require estoppel letters from the borrower.

7 There is no standard as to the minimum representations and warranties a lead lender should make. These representations and warranties fall into two categories: (i) those dealing with the lead lender's corporate authority and ownership of the loan; and (ii) those addressing the quality of the loan. To the extent that certain facts can be ascertained by due diligence or underwriting, the need for broad representations and warranties as to loan quality diminishes. Representations and warranties are never a substitute for due diligence. since they are only as good as the credit of the lead lender.

S Following In re Hamilton Mortgage Company (No. Bk-76-264. E.D. Tenn. (1977)). participants began to impose fiduciary responsibilities in participation agreements with respect to a lead lender's possession of loan documents and funds recovered on a loan (a Ithough not generally with respect to its other obli gations).

9 Most form participation agreements. such as those of the United States Saving and loan league and the California Savings and loan league, provide that the lead lender will service the loan the same way it services loans for its own account. and be liable only for gross negligence. bad faith and/or willful misconduct (i.e., acts or omissions bordering on the intentional). Given the nature of a loan participation and the participant's reliance on the lead lender. most prudent institutional buyers require a fiduciary or a "prudent man" standard of care with respect to servicing.

10 Even with an acceptable standard of care for servicing and other acceptable contract rights, a lawsuit for breach of contract is the only redress for improper servicing. ~nding resolution of the litigation, the allegedly improper conduct would continue. A termination "without cause" provision, coupled with an agreed-to payment somewhat reflective of the reasonable market value of the servicing, could prove a valuable alternative to litigation.

11 The absence of such a provision coupled with only a mar-ginally satisfactory standard of care for servicing could result in a lack of legal redress where the lead lender is reluctant to take a firm stand with the borrower.

12 Many thrift institutions have adopted this approach for commercial loans. In general. it has not been acceptable outside the savings and loan industry.

Real Estate Finance

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1311 U.s.e. 541 (d). See also In re Columbia Pacific Mortgage, Inc 20 Bank, 259 (W.O. Wash. 1981)) confirming this section as it relates to participations and asset sales.

1412 U.s.e.1821. " Hibernia National Bank v Federal Deposit Insurance Corp 733 F2d

1403 (10th Cir. 1984) The rationale is that a depositor of an insolvent bank has the right to set-oH any deposits against indebtedness owing to the bank and only the balance of the debt is considered an asset of the insolvent bank. Scott v. Armstrong 146 U.S. 499 (1892) In the foregoing cases, the loans involved were not mortgage loans. While there are no reported cases extending the oH-set principle to federally chartered or F SlICinsured thrift institutions, the cases involving insolvencies of national banks would be a compelling precedent.

1b As an extra precaution, participants are imposing additional requirements, e.g., that an independent third-party bank custodian hold the loan documents, that each borrower be sent written notice of the sale to the participant, and that the note and mortgage be endorsed and assigned of record from the lead lender as owner to the lead lender as servicer.

17 There are a number of variations on this theme. Greater flexibility is available if the participation can be structured at the time the loan is originated. In some cases, originating the loan as a first and second mortgage loan may avoid a number of

Vol. 4, No.1, Spring 1987

the issues raised by the participation structure, including creation of a "fast-pay, slow-pay" loan by virtue of a series of notes.

16 Partial scheduled payments of principal and interest, if accepted, would be applied first to the senior interest and then to the junior interest, since a tender of an incomplete or partial scheduled payment would be a default under the loan. Given the lien priority of the senior interest, hazard insurance proceeds and condemnation awards would first be applied to the senior interest. Any resulting adjustments to scheduled principal and inferest payments would be distributed pro rata. Absent payment subordination, voluntary partial payments and the proceeds of title insurance policies would be distributed pro rata.

19 This is similar to the diHerence in interest rates charged on first and second mortgage loans.

20 Priorities disappear since the loan is satisfied and the partic-ipation agreement is terminated. To create senior/junior interests in real property would require an extremely complicated partnership or joint venture agreement. The better way might be to grant each party an option to purchase the other's interest, with the participant's right being superior or prior in time. If the lead lender did not make an orter, the participant would take title to the property free from any claims by the lead lender.

21 This might be a right specifically granted by statute or it may be by way of a partial foreclosure where permitted by law

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-and-

SUBORDINA TION AND INTERCREDITOR AGREEMENT

Dated:

Location:

Block: Lot: County:

RECORD AND RETURN TO:

Messrs. Thacher, Proffitt & Wood 2 World Trade Center

New York, New York 10048

Attention:

Title No.:

INY01750741J 01/24/954:05pm (99999-00091]

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SUBORDINA TION AND INTERCREDITOR AGREEMENT

THIS SUBORDINATION ("Agreement") made as of the __ day of __________________________ _

AND INTERCREDITOR 19

AGREEMENT , by and between

,a _________ , having an office at _______________________________________________________ ____________________ (hereinafter referred to as the "Subordinate Mortgagee") and ______________ ________________________________________________ _ a ___________________________ , having an office at __________________________________ ________________ (hereinafter referred to as the "Senior Mortgagee").

WITNESSETH:

WHEREAS, the Senior Mortgagee is the owner and holder of that certain mortgage described on Exhibit B attached hereto (said mortgage, and any extensions, modifications, substitutions and consolidations thereof, being hereinafter referred to as the "Senior Mortgage"), covering the _____________ estate of ______________________________(the "Borrower") in certain premises located in the County of _________________________________ and State of _____________ , as more particularly described on Exhibit A attached hereto and made a part hereof, together with all improvements located thereon (collectively the "MortgagedPremises"), and the note secured thereby (said note, and any extensions, modifications or substitutions thereof, being hereinafter referred to as the "Senior Note"), evidencing and securing a certain loan made by the Senior Mortgagee to the Borrower (the "Senior Loan"); and

WHEREAS, the Borrower is about to execute and deliver to the Subordinate Mortgagee (i) a note (said note, and any extensions, modifications or substitutions thereof, being hereinafter referred to as the "Subordinate Note") in the principal sum of _______________________ __________ ~ ________________________ Dollars ( ___________________); (ii) the subordinate mortgage (said mortgage, and any extensions, modifications, substitutions and consolidations thereof, being hereinafter referred to as the "Subordinate Mortgage") securing said note; and (iii) a collateral assignment of leases and rents covering the Mortgaged Premises, evidencing and securing a certain subordinate loan to be made by the Subordinate Mortgagee to the Borrower (the "Subordinate Loan"); and

WHEREAS, the Subordinate Mortgage is intended to be recorded immediately prior to this Agreerrient in the ___________________office of _______________County, State of ______ ;and

WHEREAS, the Senior Mortgagee is unwilling to allow the Borrower to further encumber the Mortgaged Premises with the Subordinate Mortgage unless the Subordinate Mortgage is subordinated to the Senior Mortgage in the manner hereinafter set forth;

INYOI :75074.11 01/24/'15 405rll1 f9'1'1'19·00092]

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NOW, THEREFORE, in consideration of the mutual premises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, the Subordinate Mortgagee and the Senior Mortgagee hereby agree as follows:

1. The Subordinate Mortgage, any other document evidencing, securing or guaranteeing the indebtedness secured by the Subordinate Mortgage or otherwise executed in connection with the Subordinate Mortgage (collectively, together with any extensions, modifications, substitutions and consolidations thereof, being hereinafter collectively referred to as the "Subordinate Loan Documents") and all advances made thereunder are hereby, and shall continue to be, subject and subordinate in lien and in payment to the lien and payment of the Senior Mortgage and any other document evidencing, securing or guaranteeing the indebtedness secured by the Senior Mortgage or otherwise executed in connection with the Senior Mortgage (collectively, together with any extensions, modifications, substitutions and consolidations thereof, being hereinafter collectively referred to as the "Senior Loan Documents") and all advances made thereunder without regard to the application of such proceeds, together with all interest, prepayment premiums and all other sums due under the Senior Mortgage, and the note secured thereby. All of the terms, covenants and conditions of the Subordinate Mortgage and the Subordinate Loan Documents are hereby, and shall continue to be, subordinate to all of the terms, covenants and conditions of the Senior Mortgage and the Senior Loan Documents. The foregoing shall apply, notwithstanding the availability of other collateral to the Senior Mortgagee or the actual date and time of execution, delivery, recordation, filing or perfection of the Senior Mortgage or the Subordinate Mortgage, or the lien or priority of payment thereof, and notwithstanding the fact that the Senior Loan or any claim for the Senior Loan is subordinated, avoided or disallowed, in whole or in part, under Title 11 of the United States Code (the "Bankruptcy Code") or other applicable federal or state law. In the event of a proceeding, whether voluntary or involuntary, for insolvency, liquidation, reorganization, dissolution, bankruptcy or other similar proceeding pursuant to the Bankruptcy Code or other applicable federal or state law, the Senior Loan shall include all interest accrued on the Senior Loan, in accordance with and at the rates specified in the Senior Loan Documents, both for periods before and for periods after the commencement of any of such proceedings, even if the claim for such interest is not allowed pursuant to applicable law.

2. In addition, without limiting the foregoing, the Subordinate Mortgagee agrees that all rights of the Subordinate Mortgagee under the Subordinate Mortgage or under the Subordinate Loan Documents in and to the Mortgaged Premises and the proceeds thereof (including assignments of leases and rents, issues and profits and the rights with respect to insurance proceeds and condemnation awards) shall be expressly subject and subordinate:

(a) to the rights of the Senior Mortgagee in and to the Mortgaged Premises and the proceeds thereof (including assignments of leases and rents, issues and profits and rights with respect to insurance proceeds and condemnation awards) on the terms set forth in the Senior Mortgage and the Senior Loan Documents; and

INYOI75(741) 01/24/95 405rlll 199999-00092] - 2 -

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(b) to any and all advances made and other expenses incurred under, and as permitted in, the Senior Mortgage and the Senior Loan Documents.

3. The Subordinate Mortgagee hereby represents and warrants that (a) it is now the owner and holder of the Subordinate Mortgage; (b) the Subordinate Mortgage is now in full force and effect; (c) the Subordinate Mortgage has not been modified or amended; (d) the Borrower is not in default in the observance and/or performance of any of the obligations thereunder required to be observed and performed by the Borrower; (e) no event has occurred, which, with the passing of time or the giving of notice or both would constitute a default thereunder; (f) all payments due thereon to and including the date hereof, have been paid in full; (g) the principal balance of the Subordinate Mortgage is $ __________________ ; (h) interest on the principal balance shall be calculated at the annual rate of %; (i) no scheduled monthly payments under the Subordinate Note has been prepaid; (j) the Subordinate Loan does not provide for negative amortization or the accrual, deferral or capitalization of interest; (k) the Subordinate Loan does not provide for the payment of any prepayment fee or penalty or any other fee in connection with the acceleration or maturity of the Subordinate Loan; (1) the Subordinate Loan is non-recourse with respect to the observance and performance by Borrower of all of its obligations thereunder and the Mortgaged Premises is the only collateral secured by the Subordinate Loan; (m) any rights of the Subordinate Mortgagee in and to the lien, estate or other interest in the Mortgaged Premises is not subject to the rights of any third parties by way of subrogation, indemnification or otherwise; (n) the Subordinate Loan does not provide for any equity kickers, Additional Interest, shared appreciation or any kind of equity participation by the Subordinate Mortgagee.

4. The Subordinate Mortgagee hereby agrees that so long as any sum shall remain outstanding on the Senior Mortgage:

(a) The Subordinate Mortgagee shall simultaneously send to the Senior Mortgagee due notice of all defaults under the Subordinate Mortgage as well as copies of all notices required to be delivered to the Borrower under the Subordinate Mortgage. Notice under the Subordinate Mortgage shall not be deemed effective until such notice has been received by the Senior Mortgagee. The Senior Mortgagee shall have the right, but shall not have any obligation whatsoever, to cure any such default within ten (10) days after the expiration of the applicable grace period permitted to the Borrower under the Subordinate Loan Documents.

Furthermore, with respect to non-monetary defaults under the Subordinate Loan Documents, if (i) such non-monetary default is not susceptible to being cured with reasonable effort within such ten (10) day period, (ii) the Senior Mortgagee, within such ten (10) day period, gives the Subordinate Mortgagee written notice of its intention to cure any such default, (iii) during the time in which the Senior Mortgagee is curing such default, all other obligations evidenced or secured by the Subordinate Loan Documents are at all times paid and performed in a complete and timely fashion, and (iv) thereafter, the Senior Mortgagee promptly commences and diligently prosecutes the cure to completion, the Subordinate Mortgagee shall not commence any Enforcement Action (hereinafter defined) permitted herein. Nothing contained in this Agreement shall be deemed or construed to require the Senior Mortgagee to

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commence or continue to prosecute any such cure to completion or prevent the Senior Mortgagee from discontinuing such cure.

The term "Enforcement Action" shall mean, with respect to the Subordinate Loan, the acceleration of all or any part of the Subordinate Loan, any foreclosure proceeding, the exercise of any power of sale, the acceptance by the Subordinate Mortgagee of a deed or assignment in lieu of foreclosure, the obtaining of a receiver, the seeking of default interest, the taking of possession or control of, the suing on the Subordinate Note or any guaranty in favor of the Subordinate Mortgagee, the exercising of any banker's lien or rights of set-off or recoupment, or the taking of any other enforcement action against the Premises;

(b) Subject to paragraph 4(a) herein, the Subordinate Mortgagee shall not, without the prior written consent of the Senior Mortgagee or unless the Senior Mortgagee shall have received prior written notice of Subordinate Mortgagee's intention to do the following, declare a default under the Subordinate Mortgage with respect to the Mortgaged Premises or accelerate the indebtedness secured by the Subordinate Mortgage against the Mortgaged Premises or commence any action to foreclose the Subordinate Mortgage against the Mortgaged Premises or take any other Enforcement Action;

(c) In the event (i) the Senior Loan becomes due or is declared due and payable prior to its stated maturity, (ii) the Subordinate Mortgagee receives any prepayment of principal or interest, in part or in whole, under the Subordinate Mortgage contrary to the terms of the Subordinate Loan Documents or Borrower is in default under the Senior Loan Documents, or (iii) any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the property, assets or business of the Borrower or the proceeds thereof, in whatever form, to any creditor or creditors of the Borrower or to any holder of indebtedness of the Borrower by reason of any liquidation, dissolution or other winding up of the Borrower or its business, or of any receivership or custodianship for the Borrower of all or substantially all of its property, or of any insolvency or bankruptcy proceedings or assignment for the benefit of creditors or any proceeding by or against the Borrower for any relief under any bankruptcy, reorganization or insolvency law or laws, federal or state, or any law, federal or state, relating to the relief of debtors, readjustment of indebtedness, reorganization, composition or extension, then, and in any such event, any payment or distribution of any kind or character, whether in cash, property or securities which shall be payable or deliverable with respect to any or all of the Subordinate Loan or which has been received by the Subordinate Mortgagee shall be held in trust by the Subordinate Mortgagee for the benefit of the Senior Mortgagee and shall forthwith be paid or delivered directly to the Senior Mortgagee for application to the payment of the Senior Loan to the extent necessary to make payment in full 'of all sums due under the Senior Loan remaining unpaid after giving effect to any concurrent payment or distribution to the Senior Mortgagee. In any such event, the Senior Mortgagee may, but shall not be obligated to, demand, claim and collect any such payment or distribution that would, but for these subordination provisions, be payable or deliverable with respect to the Subordinate Loan. In the event of the occurrence of (i), (ii) or (iii) above and until the Senior Loan shall have been fully paid and satisfied and all of the obligations of the Borrower to the Senior Mortgagee have been performed in full, no payment shall be made to or accepted by the Subordinate Mortgagee in respect of the Subordinate Loan;

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(d) No tenant under any lease of any portion of the Mortgaged Premises will be made a party defendant in any foreclosure of the Subordinate Mortgage nor will any Enforcement Action or any other action be taken that would terminate any leases or other rights held by or granted to or by third parties with respect to the Mortgaged Premises;

(e) (i) If any action or proceeding shall be brought to foreclose the Subordinate Mortgage or commence any other Enforcement Action, no portion of the rents, issues and profits of the Mortgaged Premises shall be collected except through a receiver appointed by the court in which such foreclosure action or proceeding is brought, after due notice of the application for the appointment of such receiver shall have been given to the Senior Mortgagee and the rents, issues and profits so collected by such receiver shall be applied first to the payment of maintenance of taxes and insurance on the Mortgaged Premises, and then to the payment of principal and interest due and owing on the Senior Mortgage prior to the payment, if any, of any principal or interest due and owing on the Subordinate Mortgage; (ii) if during the pendency of any such foreclosure action or proceeding, an action or proceeding shall be brought by the Senior Mortgagee for the foreclosure of the Senior Mortgage and an application is made by the Senior Mortgagee for an extension of such receivership for the benefit of the Senior Mortgagee, all such rents, issues and profits held by such receiver as of the date of such application shall be applied by the receiver solely for the benefit of the Senior Mortgagee, and the Subordinate Mortgagee shall not be entitled to any portion thereof until all sums due and owing pursuant to the Senior Mortgage have been paid in full and applied as aforesaid; (iii) notice of the commencement of any foreclosure of the Subordinate Mortgage shall be given to the Senior Mortgagee and true copies of all notices thereof and papers served or entered in such action shall be delivered to the Senior Mortgagee, and (iv) the Subordinate Mortgagee shall waive its rights under New York's Real Property Actions and Proceedings Law, section 1351(3), to request that a final judgment in a foreclosure of the Senior Mortgage direct payment of all or any part of the indebtedness secured by the Subordinate Mortgage from the proceeds of the foreclosure sale of the Senior Mortgage;

(f) In the event the Senior Mortgagee shall release, for the purposes of restoration of all or any part of the improvements on or within the Mortgaged Premises, its right, title and interest in and to the proceeds under policies of insurance thereon, and/or its right, title and interest in and to any awards, or its right, title and interest in and to other compensation made for any damages, losses or compensation for other rights by reason of a taking in eminent domain, the Subordinate Mortgagee shall release for such purpose all of its right, title and interest, if any, in and to all such insurance proceeds, awards or compensation and the Subordinate Mortgagee agrees that the balance of such proceeds remaining shall be applied to the reduction of principal under the Senior Mortgage and if the Senior Mortgagee holds such proceeds, awards or compensation and/or monitors the disbursement thereof, the Subordinate Mortgagee agrees that the Senior Mortgagee shall also hold and monitor the disbursement of such proceeds, awards and compensation to which the Subordinate Mortgagee is entitled. Nothing contained in this Agreement shall be deemed to require the Senior Mortgagee, in any way whatsoever, to act for or on behalf of the Subordinate Mortgagee or to hold or monitor any proceeds, awards or compensation in trust for or on behalf of the Subordinate Mortgagee, and all or any of such sums so held or monitored may be commingled with any funds of the Senior Mortgagee;

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(g) If the Subordinate Mortgagee shall acquire by indemnification, subrogation or otherwise, any lien, estate, right or other interest in the Mortgaged Premises, that lien, estate, right or other interest shall be subordinate to the Senior Mortgage as provided herein, and the Subordinate Mortgagee hereby waives any and all rights it may acquire by subrogation or otherwise to the lien of the Senior Mortgage or any portion thereof;

(h) The Subordinate Mortgagee shall not pledge, assign, hypothecate, transfer, conveyor sell the Subordinate Mortgage or any interest in the Subordinate Mortgage [other than to an Institutional Mortgagee (as hereinafter defined) or modify, waive or amend any of the terms or provisions of the Subordinate Mortgage, without the prior written consent of the Senior Mortgagee. The term "Institutional Mortgagee" shall mean any of the following entities holding the Subordinate Mortgage for its own account, and not for the account of any other entity: (i) a federal or state chartered commercial bank or trust company or federal or state chartered savings bank or savings and loan association or insurance company organized and existing under the laws of the United States, or any state thereof, (ii) a foreign bank or a branch office of a foreign bank, (iii) a foreign pension fund not subject to ERISA, (iv) a foundation, college or university, or (v) a nationally recognized commercial credit corporation. Any such entity described in the preceding sentence shall: (W) have a net worth in excess of $200,000,000.00, (X) not be a parent, subsidiary or affiliate of or an entity owned or controlled, in whole or in part, directly or indirectly, by the Borrower, (Y) be experienced in making commercial real estate loans on property of the size and character of the Mortgaged Premises, and (Z) agree in writing to be subject to all of the terms, conditions and obligations under the Subordinate Loan Documents;

(i) As to all leases now or hereafter in effect with respect to the Premises, the Subordinate Mortgagee agrees to approve all leases which are approved by the Senior Mortgagee. The Subordinate Mortgagee shall also enter into recognition and nondisturbance agreements with any tenants to whom the Senior Mortgagee has granted recognition and non-disturbance, on the same terms and conditions given by the Senior Mortgagee;

(j) The Subordinate Mortgagee hereby expressly consents to and authorizes, at the option of the Senior Mortgagee, the release of all or any portion of the Mortgaged Premises from the lien of the Senior Mortgage, and hereby waives any equitable right in respect of marshalling it might have, in connection with any release of all or any portion of the Mortgaged Premises by the Senior Mortgagee under the Senior Mortgage, to require the separate sales of any portion of the Premises or to require the Senior Mortgagee to exhaust its remedies against any portion of the Premises, or any combination of the portions of the Premises or any other collateral, or to require the Senior Mortgagee to proceed against any portion of the Premises or combination of the portions of the Premises or any other collateral, before proceeding against any other portion of the Premises or combination of the portions of the Premises, and further, in the event of any foreclosure, the Subordinate Mortgagee hereby expressly consents to and authorizes, at the option of the Senior Mortgagee, the sale, either separately or together, of all or any portion of the Mortgaged Premises;

(k) The Subordinate Mortgagee shall not collect payments for the purpose of escrowing taxes, assessments or other charges imposed on the Mortgaged Premises

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or insurance premiums due on the insurance policies required under the Senior Mortgage or the Subordinate Mortgage if the Senior Mortgagee is collecting payments for such purposes, however, the Subordinate Mortgagee may collect payments for such purposes if the Senior Mortgagee is not collecting the same, provided such payments shall be held in trust by the Subordinate Mortgagee to be applied only for such purposes;

(I) After request by the Senior Mortgagee, the Subordinate Mortgagee shall within ten (10) days furnish the Senior Mortgagee with a statement, duly acknowledged and certified setting forth the original principal amount of the note evidencing the indebtedness of the Subordinate Mortgage, the unpaid principal balance, all accrued interest but unpaid interest and any other sums due and owing thereunder, the rate of interest, the monthly payments and that there exists no defaults under the Subordinate Note and the Subordinate Mortgage;

(m) In any case commenced by or against the Borrower or a general partner of Borrower under Chapter 11 of the Bankruptcy Code or any similar provision thereof or any similar federal or state statute (a "Reorganization Proceeding"), the Senior Mortgagee shall have the exclusive right to exercise any voting rights in respect of the Senior Mortgage and the other Senior Loan Documents, and the Subordinate Mortgagee shall have the exclusive right to exercise any voting rights in respect of its claims against the Borrower or the general partners of the Borrower, except that without the consent of the Senior Mortgagee, the Subordinate Mortgagee shall not have the right to vote affirmatively in favor of any plan of reorganization unless the Senior Mortgagee grants its permission thereto or the Senior Mortgagee votes to accept such plan;

(n) In any Reorganization Proceeding with respect to the Borrower or any general partner of the Borrower, (a) the Subordinate Mortgagee shall file a proof of claim in respect of its claims against the Borrower or any general partner of the Borrower and shall send to the Senior Mortgagee a copy thereof together with evidence of the filing with the appropriate court or other authority, (b) if the Subordinate Mortgagee should fail to file such proof of claim by the tenth (lath) business day before the last day for filing of proofs of claim, or if the Senior Mortgagee reasonably believes that the proof of claim so filed is less than the proper amount thereof, then the Senior Mortgagee may file such proof of claim, or corrected proof of claim, on behalf of the Subordinate Mortgagee, and (c) if objection is made to the allowance of any claim of the Subordinate Mortgagee, the Senior Mortgagee shall have the right to intervene and fully participate in such proceedings and if such rights are denied and the Subordinate Mortgagee fails to defend such claim, then the Senior Mortgagee may defend such claim in the name of the Subordinate Mortgagee; and

. (0) To the extent any payment under the Senior Loan Documents (whether by or on behalf of the Borrower, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to a trustee, receiver or other similar party under any bankruptcy, insolvency, receivership or similar law, then if such payment is recovered by, or paid over to, such trustee, receiver or other similar party, the Senior Loan or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred.

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5. The Senior Mortgagee hereby consents to the placing of the Subordinate Mortgage on the Mortgaged Premises subject to the terms of this Agreement. This consent is limited to the Subordinate Mortgage described above and shall not be deemed to (a) be a consent to any future encumbrances or to any modification, renewal, extension or increase of the Subordinate Mortgage, (b) be a waiver of the limitation on further encumbrances contained in the Senior Mortgage, (c) be a consent to or waiver of any other term or condition of the Senior Mortgage, or (d) prejudice any right or rights which the Senior Mortgagee may now or in the future have under or in connection with the Senior Mortgage.

6. The Senior Mortgagee and the Subordinate Mortgagee shall cooperate fully with each other in order to promptly and fully carry out the terms and provisions of this Agreement. Each party hereto shall from time to time execute and deliver such other agreements, documents or instruments and take such other actions as may be reasonably necessary or desirable to effectuate the terms of this Agreement.

7. N a failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder.

8. Each party hereto acknowledges that to the extent that no adequate remedy at law exists for breach of its obligations under this Agreement, in the event either party fails to comply with its obligations hereunder, the other party shall have the right to obtain specific performance of the obligations of such defaulting party, injunctive relief or such other equitable relief as may be available.

9. Any notice to be given under this Agreement shall be in writing and shall be deemed to be given when received by the party to whom it is addressed. Notices shall be in writing and sent by registered mail, hand delivery or by special courier (in each case, return receipt requested). Notices to the other party hereto shall be sent to the address first set forth herein or such other address or addressees as shall be designated by such party in a written notice to the other parties.

10. In the event of any conflict between the provisions of this Agreement and the provisions of the Subordinate Mortgage or the Subordinate Mortgage Loan Documents the provisions of this Agreement shall prevail.

11. No person, including, without limitation, Borrower, other than the parties hereto and their successors and assigns as holders of the Senior Mortgage and the Subordinate Mortgage shall have any rights under this Agreement.

12. This Agreement may be executed in two or more counterparts each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

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13. No amendment, supplement, modification, waiver or termination of this Agreement shall be effective against a party against whom the enforcement of such amendment, supplement, modification, waiver or termination would be asserted, unless such amendment, supplement, modification, waiver or termination was made in a writing signed by such party.

14. In case anyone or more of the provisions contained in this Agreement, or any application thereof, shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein, and any other application thereof, shall not in any way be affected or impaired thereby.

15. This Agreement shall be construed in accordance with and governed by the laws of the State of New York.

16. This Agreement shall bind and inure to the benefit of the Senior Mortgagee and the Subordinate Mortgagee and their respective successors, permitted transferees and assigns.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written.

By: Name: Title:

By: Name: Title:

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EXHIBIT A

(Description of Premises)

ALL that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being

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INYOI7SI17~I) OI!24/YS 40Srlll /99999-IKKI92)

EXHIBIT B

(Description of Mortgages)