In a recent transaction, we represented the owner of three properties in a mid-eight figure range “securitized loan” refinancing with a major New York bank and its affiliates and clients involving both first lien and mezzanine loans. Before the loan could even proceed, each of the three single-asset ownership entities which were in place from the original development had to be restructured and renegotiated between the principals and their investors to accommodate the changed economics of the properties and the requirements of the lenders. Then the three entities (with all their respective partners in tow) were brought into a new single third level limited liability company by way of the contribution of their properties to a new first level mortgage borrower. In exchange for that contribution, the third level entity obtained ownership of the second-tier mezzanine borrower, which in turn owned all of the interests in the first tier level borrower. Sounds complicated? Surely, but it is commonplace with securitized loans, as is the baggage that necessarily comes with it.
Because the loans are laid off into the so-called “secondary market” and are managed by other financial entities as trustees for these investors, they are subject to some very rigid requirements which impose significant legal costs, ultimately paid by the borrower. In this particular transaction, there were almost two dozen attorneys involved with both the primary and secondary (mezzanine) lenders and assorted related players such as multiple legal opinion givers, mandated independent directors imposed by the lenders, registered agents in Delaware, and specialty title insurers.
Due to the requirements of the New York bank and its mezzanine lending customers, both the first and second tier entities had to be sited in Delaware. The mezzanine lenders, though providing only 20% or so of the total borrowings, are usually some of the first lender major bank’s leading clients to whom the bank lays off a somewhat higher risk note at the higher interest rate reflected in the mezzanine note. In all, eleven separate legal opinions were required from three law firms, two of which were required to be employed solely for that purpose. Meanwhile, the loans had to be simultaneously coordinated with yet another party, namely the franchisor of the real estate properties so that they could provide required assurances to the lenders that in the event of foreclosure by the lender, the new owners would be entitled to carry on the business under the franchise “flag.”
We dealt as sole representative of our client with nine attorneys representing the first and second tier lenders, as well as with the opinion-givers. In similar transactions, the borrower’s legal costs, which are broader in scope than the loan transaction itself, might be in the range of 60%-65% of the total fees. But because of our ability to handle all aspects of the transaction individually, which was, based on our experience, recognized by the lenders, and and because we could deal individually with the field of attorneys, and do so without needing to refer various aspects to partners or require the assistance of associates, the fees we were able to charge were less than 40% of the total.