Hedge funds and private equity firms have provided loans. Now they are filing a complaint.

With the default rate on large commercial real estate loans in the United States nearly doubling in just one month, the big banks, which are among the largest real estate lenders, have generally been willing to give homeowners time to settle. problems with tenants. . A class of small lenders shows 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, shopping 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 decided to foreclose on its $ 35 million mezzanine loan. A New York judge blocked the attempt, claiming that the action was not justified and not “commercially reasonable” during a pandemic.

Unlike traditional mortgage lenders, whose loans are secured by real estate, mezzanine lenders provide loans that can be converted into an equity interest in the business if the owner is unable to pay the mortgage, rather than the property itself. same. Thus, “mezz” loans, which generally pay high interest rates, are both riskier and more rewarding for investors.

A foreclosure is a way for a mezzanine lender to recoup potential losses by arranging the sale or auction of a delinquent loan as well as their stake in a borrower’s business. If no bidder shows up, the mezzanine lender can oust the borrower and take over as the owner or real estate developer. Judges have tended to side with mezzanine lenders in foreclosure litigation, but the pandemic has prompted some judges to be more sympathetic to financially troubled borrowers.

The decisions of the New York court on whether mezzanine lenders should exclude borrowers during the pandemic are particularly important because New York law is often central to resolving disputes between lenders and borrowers.

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