JSC EDF “DAMU” puts credit funds in a second level banks. All programs of LARGE support realized by DAMU are distinguished by priority to ensure targeting and repayment of public funds. Stabilization programs helped to keep lending to Large in the difficult period of economic crisis. More than 9,000 projects on stabilization program funded amounting to 421 billion dollars as the result of the activity for the first half of 2010, from the end of 2007. Over 12,000 jobs were created and supported. Money were issued on the revolving basis, and repayments were directed again to Large by banks. Sectoral programs aimed to diversifying the economy, LARGE real sector development. The following programms: "Damu-Ondіrіs", "Damu-Koldau", "Micro crediting of a female entrepreneurship" and "LARGE financing, Zhanaozen city of Mangistau region” are implementing by the fund in this area. More than 300 projects on these programs were funded amounting to 29 billion tenge. More than 5,000 jobs were created and supported. Non-bank financing development programs are aimed to microfinance sector supporting and developing as the third level of Kazakhstan financial system and leasing. The program of microcredit organizations funding through the second level banks and the placement of funds in the leasing companies is implementing by the fund in this area.

A multitranche loan of Asian Development Bank under the state guarantee of the Government of the Republic of Kazakhstan was obtained in order to expand the funding base for lending to large and medium business and ensure its long-term financing. Attracted funds are the largest loan on large sector development in the history of the ADB. The total loan amount - 500 million dollars (1 tranche - 150 million U.S. dollars in 2010, 2 tranche - 150 million U.S. dollars in 2011, 3 tranche - 200 million U.S. dollars after the development of 1 and 2 tranches). At the same time, loans for entrepreneurs in the first tranche will be issued in tenge. The term of each tranche - 7 years. Deposit rate - approximately 5-6%.

One of the major problems in the lending is the high interest rates. Banks are forced to bear the cost of risk on loans by increasing interest rates because of large business low non-coverage of loans.

Microcredit is increasingly in demand among businesses that operate in rural areas. As of October 1, 2010, according to the Statistics Agency, there are 1770 of microcredit organizations registered in Kazakhstan. In the first half of 2010, microcredit organizations have been granted 164,400 micro-credits totaling 23.4 bln. For comparison, in 2009, microcredit organizations have provided more than 190,198 micro-credits totaling $ 37.7 billion.

The weighted average interest rate on loans in urban areas is higher than in rural areas. If the interest rate on short-term loans for individuals in the city is 32.8% per annum, then in rural areas - 17,2%, on long-term loans - 27% and 14% respectively.

Micro-credit organizations are the least state regulated system level of credit relationships, which leads to the opacity of their activities.

The main directions of implementation «Road Map of Business-2020» are to subsidize interest rates on loans and partial credit guarantees. The program "Road Map of Business-2020" aims to support entrepreneurs working in the priority sectors of the economy. If the former state program of supporting Large, implemented through the fund "Damu" were aimed at anti-crisis program, then the current program is directed at further development of new business projects. In addition, it implies support for existing projects. It is expected to reduce subsidy rates for those entrepreneurs whose business is a priority in the region. Subsidization of interest on loans is made ??by all three directions of the program. A partial guarantee for loans is made ??only to the first direction - support new business initiatives, i.e. in obtaining new loans. Loans are subsidized with nominal rate no more than 14%: 7% is paid by program participant (LARGE) 7% - compensates the state, and the maximum amount of guarantee - up to 50% of the loan amount. Fund “Damu” plays a key role of the financial agent and program coordinator.

As of December 6, 2010 second-tier banks considered 648 applications for subsidies of loans totaling $ 314.0 billion, and for guarantee of loans are approved 36 projects totaling $ 9.1 bln loan. However, there are negative and narrow points in the implementation of the Programme. There is a low activity of local executive bodies to review projects by providing support. In some regions, there are only one or two loans supported by subsidies to entrepreneurs.

Large that engaged in manufacturing of the country are also use leasing services. Despite to its significant growth, leasing market in Kazakhstan has not reached the level corresponding not only the developed countries of Europe, but even Russia and the Ukraine: the share of leasing in investment in manufacturing assets in Russia is 5-6%, while in Kazakhstan - only 1,5% (for comparison: in Eastern Europe a similar figure is 30%).

The liquidity crisis of the financial sector has strongly influenced not only to the further development, but even to the conservation of mature market of leasing services in the Republic of Kazakhstan. Given the fact that most active leasing companies were "daughters" of commercial banks, they were primarily affected by the liquidity crisis: banks just cut them access to their credit resources.

Leasing activity in Kazakhstan is not subjected to licensing. There is no single body that regulates this market. Only leasing companies that affiliated with banks are controlled by the Financial Supervision Agency. Therefore, the statistics of the leasing market in the context of the companies is not conducted. One of the leading leasing companies are "Kazagrofinance", "DBK-Leasing"and "Leasing company"Astana-Finance ".

To enable the expansion and modernization of fixed assets of Large in priority economic sectors by Fund “Damu”, there is the Program of financing leases for LARGE's. As of July 1, 2010 the Fund posted credit funds of JSC "Stress Assets Fund" in JSC "Leasing Group" totaling $ 375 million tenge (by 2 tranches) and JSC "Temirlizing" in the amount of 255.6 million tenge (by 2 tranches).

Leasing is more attractive to entrepreneurs because there is no need for additional pledged security. However, disadvantage is that leases granted only for 3-5 years, while in Western it is usually 10-15 years. This is a very short period to repay the debt, since a technique that is taken on lease, is very expensive.

Currently, due to Large difficulties in obtaining credit and a lack of equity for further development, equity investments has acquired a special urgency. Access to investment is made through Private Equity Funds (JSC «Kazyna Capital Management», JSC "Kazakhstan Investment Fund), venture capital funds (JSC" NIF "), business angels.

Advantages of direct investments are increase in share capital of the company, opening up access to cheaper credit, improvement of its capital structure; do not require payment of interest and provision of any collateral.

In addition, private equity funds provide intangible resources for the company - advice, experience, knowledge, and also contribute to improving the management company, building it into line with international standards of financial and management reporting.

For the financing of innovative large businesses it is necessary to raise resources of venture funds, 11 of which have already been established by JSC "NIF" together with local and foreign investors. The share of JSC "NIF" in Kazakh venture funds is up to 49%.The investment policy of these funds is directed at finding and bringing projects in the sphere of information and communication technology (hereinafter - ICT), new buildingmaterials, pharmaceuticals and other promising industries with export potential.

Despite the large number of venture funds, their activities are not always effective. According to the Accounts Committee at the date of 1 October 2009 six venture capital funds out of 11 have made losses totaling $7.5 bln. Only three projects were implemented out of 85 funded projects.

One of the progressive forms of financial support of innovative entrepreneurship in the world is "business angels", whose investment is long term and carried out on their own initiative. The project "National Network of Business Angels of Kazakhstan” has developed by consulting company LLP “TenStep Central Asia", with the support of “Nur Otan” party, the Independent Association of Entrepreneurs of Kazakhstan, JSC “National Innovation Fund”, the financial company JSC «ZURICH INVEST MANAGEMENT». The main objectives of the project are the development of private direct investment in Kazakhstan, the creation of interactive sites of the investor with the authors of the projects. Lack of motivation in the form of tax breaks and low awareness of the population do not contribute to the development of "business angels" in Kazakhstan.

Thus, the main problems of financial support of Large today are:

- high interest rates of banks;

- short term lending, insufficient for the development of innovative business;

- unavailability of financial resources for entrepreneurs in remote areas and administrative units;

- the complexity of project selection procedures for LARGE lending through banks;

- lack of sufficient security of bank loans;

- the opacity of the micro credit organizations;

- low activity of investors in attracting companies;

- ineffectiveness of venture funds;

- lack of motivation of "business-angels”.

Problems associated with non-financial support for Large are also relevant for today.

In Kazakhstan there are a large number of institutions supporting Large. They are - 125 business support centers (hereafter BSC), 119 information-consulting centers (hereinafter ICC), 11 technoparks, 27 business-incubators. However they carry a limited support to large business, i.e. limited number of Large and their services do not meet current business requirements.

Performance indicator of the business incubator is the number of newly created innovative large businesses in the industrial segment, which are able to develop independently in the future. However, present day activities of Kazakhstani business incubator is reduced to a simple lease at market prices.

Kazakhstan's first regional business support center (BSC) was created under the initiative of JSC "Entrepreneurship Development Fund "Damu". BSC has been produced with the participation of Pavlodar State University named after S.Toraigyrov. The Foundation plans to open BSC's in South Kazakhstan Region, Kyzylorda and Karaganda regions till the end of 2010. It is planned to launch BSC in the remaining regions until the end of 2011.

Business support centers, providing services to Large in the Republic of Kazakhstan can be divided into three categories: private BSC, governorates, acting through the BSC on the basis of tenders and BSCs in EDF "Damu", who provide nearly identical services, only for different prices. Most BSCs provide information and consulting, legal, economic support to Large, develop business plans, promote credit and training, organize the participation of Large in trade fairs, etc.

Consulting, training and information services market is fully saturated in the major cities, however in the outermost regions, especially at district level - is virtually absent. The greatest number of clients was served by BSC in Almaty: in 2009 almost 13 thousands of businesses was provided different types of services. The lowest coverage observed in the Zhambyl region: business support centers assisted in preparing the 1938 business plans and provided 937 information and consulting services.

Review of existing business support centers shows that as of June 1, 2010 the largest number of objects of service support functions is in Karaganda - 48 units, Almaty - 30, East Kazakhstan - 22 units., in the Pavlodar region - 16 units. The lowest rates have Kostanai, South Kazakhstan, West Kazakhstan region - 3 units.

Customer support is also provided to entrepreneurs in the framework of the "Road Map-2020” program. As of December 6, 2010 service support was provided to 1175 enterprises, 738.9 million tenge has been allocated for these purposes from the national budget.

LARGE support infrastructure as a whole is inefficient and does not provide uniform coverage of businesses, in the absence of close links with science and production. They do not meet the objectives and priorities of industrial and innovation policies. Most of these organizations are working inconsistently. Their roles and responsibilities are not separated and partially duplicated; only the price of services differs. Reducing of accountability by institutions of non-financial support is due to lack of clearly defined objectives, objective criteria for evaluation and appropriate monitoring by the state. There is no single, unified and centralized infrastructure to support entrepreneurship, providing a comprehensive solution to the problems of large businesses. Also, there is a low coverage of large business in the regions. Activity of the consulting services providing business support infrastructure subjects is unregulated and very expensive.

The questions of advancing administrative approaches to regulate enterprises are also under the constant focus of the President and the Government of Kazakhstan: according to the instructions of the President, which are reflected on the annual message, the Government therefore conducts focused and consistent work to reduce administrative burdens on business. Strategic policy along with planning papers that define the economic development in the medium and long term, it is provided a set of measures aimed at a positive solution of related issues.

The efforts that are made by Government conducted in a systematic manner for years to reduce administrative barriers and improve business climate within the country took simultaneously several trends:

- Reforming of permit system;

- Ordering compliance and enforcement activities of state bodies;

- Improving of the Kazakhstan indicators in the Doing Business ranking of the World Bank.

The government approved the concept of improving the permit system in the Republic of Kazakhstan for 2009 - 2011, whereby the inventory of permitting procedures at the national and regional levels.

The results of the inventory revealed a number of problems. Thus, there are currently no common approaches to certain types of permits.

At initiating the licensing procedures introduction the public authorities do not take into account the specific character of particular permissions in terms of achieving the goals of state regulation, for which it is introduced.

The introduction of majority of permits implies informational purpose, i.e. their issuance enables public authorities to monitor the sphere and those permits which could be issued in a notification procedure became a serious barrier in the form of licenses.

The accreditation and certification processes are also possesses same problem, meanwhile they often substitute each other.

Hence, the need in improving of business climate requires further reform of the administrative regulation of business activity in terms of simplifying the licensing procedures, ordering of compliance and enforcement activities of state bodies. Only the consistent and strong promotion of reforms will enable Kazakhstan to attain the top 50 countries in the “Doing Business” rating of the World Bank.

Institutional support of entrepreneurship is revealed through the collection of organizations that providing favorable conditions for establishment, operation and business development.

Examples of these organizations in the country currently include: government agencies, organizations with state participation, non-governmental organizations and commercial organizations.

To date, there is a gap between the forming and implementing public policies to support and develop Large. The current situation leads to fail of implementing policies. In this regard, it is necessary to create state bodies that will be realizing the essence of the decisions to end users (state bodies and busineslargen) as well as to ensure the implementation and subsequently monitor the policy effectiveness.

The financial, service and innovative support for LARGE will be provided by specially created development institutes and organizations with state participation. Each development institute by realizing its functions will be prosecuting a goal: to move away from commodity dependence by highlighting priority areas to develop and business financing.

Service support of large will be held through the provision of facilities, equipment, consulting services and information provision. “Center of engineering technology transfer” JSC by mean of business incubators are providing building and consulting services.

Services of technology transfer, development activities and providing engineering will be carried by “Center of engineering technology transfer” JSC and “National Scientific and Technological Holding Parasat” JSC. The activities of “National Scientific and Technological Holding Parasat” JSC effectually are addressed to serve large business, while “Center of engineering technology transfer” JSC - large. Distinction between the functions of these two facilities maintenance, will concentrate “Center of engineering technology transfer” JSC only on Large, thereby enhancing the innovation business.

In order to meet the challenges of socio-economic development of the region there were created socio-entrepreneurial corporations (hereinafter SEC). Have accumulated profit from invested fund SEC directing them to the social needs of the region. However, SEC demonstrated its low efficiency.

Entrepreneurs perceived the "Regional locomotives" as another link in the receipt of government support, since the foundation of SEC the Government did not accept any legal act regulating the activities of corporations. In this regard, the Government has introduced the Decree dated 19.02.2010 acknowledging that all SEC referred to the local executive bodies and converted into regional development corporations. Taking into consideration the previous experience it is necessary to develop a law on “Regional Development Corporations”.

The performance efficiency of development institutes in Kazakhstan is assessed by Audit Committee in terms of intended use and development of the allocated funds. In addition to the quantitative asseslargent it is also necessary to conduct qualitative asseslargent of the real impact of implemented projects. Quantitative and qualitative features of the development institutes may reflect on the balanced scorecard, the projections, which are finance, marketing, personnel and the innovation level of projects.

In order to stimulate entrepreneurship it is necessary to create a web-portal that would contain information on operating, completed, planned and rejected projects of the development institutes, as well as development strategy of R&D, management team, annual reports, etc.

Thus, the Government established a set of tools to support entrepreneurship in Kazakhstan, but there is a need in systematic coordination and control of their activity.

3.3 Special Problems of Syndicated Loans

The primary incentive for syndicating loans in today's market is diversifying risk and, thus, increasing the granularity of a lender's loan portfolio. Other considerations for lenders who sell loan participations include leveraging income and reducing capital weight while building and maintaining relationships with clients. Access to the know-how and deal flow of established real estate lenders is an incentive for lenders who purchase loan participations to join a syndicate group. The majority of key players in real estate loan syndication in the United States include U.S. lenders and international lenders from such countries as Germany, France, Canada, and England, serving in roles of both agent lenders and participant lenders.

As these trends continue, it becomes increasingly important for real estate lawyers and their clients, whether they be agent banks or participants, to understand not only the driving forces behind syndication, but also the legal issues that arise in connection with these transactions, including issues often negotiated between members of the syndicate group. The respective interests among loan participants vary to the extent that pari-passu loan shares, subordinate loan shares, A/B loan structures, or mezzanine loan interests are involved in the capital stack.

Driving forces behind loan syndication

The major benefit of loan syndication is that it allows arranging lenders (who are often the loan originators) to diversify risk while maintaining close relationships with their customers. In order to minimize credit risk and to ensure acceptable levels of diversification, lenders monitor and impose limits on their exposure with regard to a particular project as well as the amount of loans made to a particular sponsor. As development projects become more complex and expensive, developers require larger loans, which may exceed a particular lender's loan exposure limits or the maximum amount that a particular lender is willing to extend to a sponsor.

Participation structures for real estate loans

In a loan involving direct participation, each participant lender acts as co-underwriter and becomes a party to the loan documents at the closing of the loan. Although each participant lender has its own contractual relationship with the borrower (and, thus, is called a co-lender), typically one of the lenders (in most cases the originator of the mortgage) will serve as the administrative agent for a group of participants. Such deals may be executed in a “club” format, in which several lenders partner to form a small lender group for transactions that exceed the risk appetite of each individual lender. The agent lender is responsible for administering the loan and maintaining the day-to-day relationship with the borrower. Each of the co-lenders owns its respective portion of the loan, which obligates such co-lender to fund to the borrower the amount to which it has committed to lend and entitles such co-lender to the benefits (i.e., interest and fees) arising out of its portion.

In a co-lending arrangement, the lead lender has certain duties to the other members of the loan group, known as the Servicing Standard. The Servicing Standard requires the lead lender to service the loan (or manage the property) in "a commercial reasonable manner" that benefits all co-lenders, and without regard to its relationships with or ownership of any other parties to the agreement.² It is sometimes stated as the higher of these standards: (a) the standard by which the lead lender services its own loans, and (b) the customary standard for servicing in the industry.

Documenting syndication relationships

Because syndication involves multiple parties, it is very important that the primary and syndication loan documents clearly define the role of each party and set forth the relative rights, obligations, and priorities among the parties. Many provisions are standard, but some may be heavily negotiated or modified by side letter between the agent lender and a co-lender.

Although loan syndication enables lenders to increase diversification and engage in transactions they might otherwise be obligated to turn down, lenders within a syndicate group give up the flexibility to make decisions independently and take actions with respect to the loan. Although the agent lender is generally granted the power to make the day-to-day decisions alone, oftentimes, loan documents provide that the consent and/or approval from some or all of the participant lenders is required for certain decisions.

In some syndications, co-lenders execute the primary loan documents with the borrower at the closing of the loan. More commonly, in a secured mortgage loan, the loan agreement, the promissory note, the mortgage and the other ancillary documents executed in connection with the closing of the loan are executed by the main underwriter. The main underwriter, as agent, is the only lender at the closing and intends to sell portions of the loan in the secondary market. To facilitate the future sale interests in the loan the agent lender must consider market pricing, loan terms, and reasonable agent/co-lender provisions at loan closing. The co-lenders do not have a real-time opportunity to review or comment on the primary loan documents or participate in negotiations with the borrower even though many provisions regarding the agency/participant lender relationship are contained in the loan agreement.

In cases where multiple underwriters execute the loan agreement as direct co-lenders, participating in the primary closing with the borrower, these concerns do not arise. Co-lenders signing the primary loan documents at closing are granted co-underwriter privileges, such as primary market pricing, co-agent and co-underwriter titles related to the transaction and are able to negotiate loan provisions to some extent, especially the sections relating to the agent/co-lender relationship.

In the absence of clear documentation, disputes can emerge regarding the roles and authority of the group vis-а-vis its individual members. The New York Court of Appeals, in Beal Savings Bank v. Sommer, 8 N.Y.3d 318 (2007), established a presumption in one such dispute. The court found that one member of a lending group could not, in contravention of the syndicate's decision, take action against a guarantor of debt obligations following the default on that debt. As the court noted, "Had the parties intended that an individual have a right to proceed independently, the Credit Agreement ... should have expressly so provided."³

Several other considerations should be accounted for in the loan documents. For instance, they may require a party to disclose the existence of any intercreditor agreements to potential assignees.⁴ Loan documents should also clearly define the lead lender's authority to act as administrative agent for the syndicate and what levels of consent from co-lenders are required before administrative agent takes various actions. Exhibit A is an example of how many lenders decide what level of consent is required for different decisions a lead lender may be called upon to make from time to time during the term of a loan. These guidelines give all members of the lending group a voice in determining key factors, yet allow specific issues to be decided without "too many cooks" getting involved.⁵ In addition, a lending group must determine if it would be willing to offer seller financing for the sale of a property, and if so, on what terms and in respect of what legal and tax structuring considerations.⁶

Assignment and assumption agreement

When lenders sell participations in a loan, the sale is documented by an agreement sometimes called an assignment and assumption or assignment and acceptance agreement. This document describes the purchase and sale of the participation interest and assigns to the buying lender both the obligations under and interests in the portion of the loan purchased from the selling lender. The assignment agreements usually provide sufficiently detailed true-sale language to support favorable treatment under capital adequacy rules. The purchasing lender may appoint the agent lender and authorize the agent lender to act on its behalf in the agreement. This document, usually the agent lender's standard form and possibly attached to the loan agreement, is not negotiated or revised heavily, because it often refers back to the rights and obligations set forth in the loan agreement. An agent lender is very unlikely to go back to the borrower to renegotiate and amend the primary loan documents. All this has made the loan assignment the preferred participation device in today's real estate syndications market.

Information rights of co-lenders and notice provisions

Generally, the primary loan documents will require third parties and the borrower to give notices with respect to the loan to the agent lender rather than to each of the co-lenders directly. The primary and/or syndication loan documents typically address the types of information that the agent lender is obligated to provide to the co-lenders and the timeframes within which the obligations must be carried out. The co-lenders often negotiate for rights to as much information relating to the loan as possible such as notices of borrower default, recording information, copies of all loan documents. The agent, however, will prefer to keep the obligation to provide information to a minimum either by negotiating to exclude certain obligations to provide such information altogether or limit the obligation to provide certain information to only after a co-lender requests such information.

Liability and reliance on agent lenders

Agent lenders usually limit their liability to co-lenders under the primary and syndication loan documents to willful misconduct or gross negligence resulting in actual damages. The agent lender is usually held to the standard that it would use in its own transactions. The courts usually accept these provisions and do not read a fiduciary relationship into the agreements between agent lender and participants. Most primary and/or syndicated loan documents provide that agent lenders are only deemed to have knowledge of a borrower default when the agent lenders have actual knowledge of such default. Some very large agent lenders, with far-flung operations, are concerned about being deemed to have knowledge of which employees not directly involved in the subject loan have actual knowledge. Therefore, they seek to limit their liability of knowledge of defaults to those defaults of which they have received written notice from either the borrower or their co-lenders. Their prospective co-lenders respond that it is a most unusual borrowers that will give its lender notice of its own default and that the co-lender's likelihood of obtaining knowledge of a default before the agent lender receives it is very remote. While a fair compromise for such large agent lenders may be to limit the universe of its employees obtaining actual knowledge of the subject borrower's default to those working on the subject loan transaction, rarely do very large agent lenders agree to that compromise. Rarely do prospective co-lenders terminate negotiations over this point.

Decision-making

The agent lender will want the maximum amount of freedom possible with respect to administering the loan, avoiding interference or delay due to co-lender involvement in the decision-making process. For example, the agent is usually granted the right to make protective advances without co-lender consent (i.e., taxes, insurance and ground lease payments) to maintain the value of the collateral in case of emergency. Co-lenders, on the other hand, will want some degree of control over certain key issues such as material amendments to the loan documents, including, but not limited to, changes in the interest rate applicable to the loan or the maturity date of the facility or increases in the facility amount. Co-lenders also want control over the management of the collateral, decisions regarding acceleration of the loan after an Event of Default, releases of any collateral and actions that affect the value of the collateral, and appointments of successor agent lenders. Co-lenders are not likely to request control over non-material issues, because they also have an interest in distancing themselves from the burdens of administering the loan. Therefore, negotiations over the granting of authority to the agent to act on behalf of the co-lenders and over the decisions that will require co-lender consent are likely to be limited to material decisions affecting the loan and the collateral.

The borrower will only want to deal with one lender for payments and other day-to-day loan administration. For more material decisions and approvals, however, loan syndication documents might require that all or a certain percentage of the participant lenders approve an action before the borrower may act, which can be a time-consuming process, causing the borrower unwanted delay. To minimize the likelihood of future issues arising within the syndicate group with respect to decision-making, it is imperative to select participant lenders with adequate risk tolerance and expertise for the subject real estate project.

Primary and syndication loan documents may distinguish between decisions requiring unanimous co-lender consent and those only requiring consent from a certain percentage of the syndicate group. Again, the agent lender will generally prefer a requirement of a lesser percentage of co-lender consent, while the co-lenders will want their votes to count on major decisions. Typically, all decisions regarding the extension of a maturity date, reduction in the interest rate and payment of debt service as well as the release of collateral require unanimous co-lender consent. Other major decisions, such as approval of changes in the controlling interest in the borrower, a borrower's request for change orders in construction loans above certain thresholds or a borrower's request to enter into all leases with respect to the mortgage property, as well as any transfers of subordinate loan interests to another lender can be tied to a qualified majority of the syndicate lenders. The calculation of the majority percentage is usually based on the individual distribution of participant lenders in the bank group and their respective money at risk, rather than on a headcount of lenders. The percentage of lenders required should be more than 51 percent of the syndicate group, but typically is set at 60 percent or 66.67 percent of the aggregated amounts of all lenders.

In loan structures involving both senior lenders and subordinate lenders, the lender relationship may be arranged such that only senior lenders have the right to be involved in decision-making. The documentation for such structures typically limits the subordinate lender's right to cure existing borrower defaults and the right to buy out the senior lender in order to gain control of the mortgage collateral. The subordinate lender's motivation and incentive to take control in default situations varies to the extent the current market value of the mortgage collateral still supports the subordinate lender's subordinate position. A/B loan structures may allow for a shift in control of decision-making to the subordinate lender once a default with respect to the senior obligation is cured. In such cases, the shift of decision-making is only valid for a period of time during which the subordinate lender can pursue foreclosure of the real estate and pay off the senior lender.

When a borrower makes a request for a change or a response from the agent lender which requires the consent of co-lenders, the agent lender must process the request before submitting the issue to the syndicate group for approval. The co-lenders then consider the information provided along with any other documentation and due diligence items that may be involved before informing the agent lender of its decision. To limit the amount of time between a borrower's request and the agent lender's response when co-lender consent is involved, agent lenders will push to limit the amount of time that the co-lenders have to consider the request and related information. Oftentimes, the primary and/or syndication loan documents will include a provision giving a number of days after which, if no co-lender response is received by the agent lender, the consent is deemed given. Co-lenders will negotiate for as long a time period as possible so that they are comfortable that they will have adequate time to consider the issue.

With little existing law in this area, and with the agency provisions of the loan agreement and the participation and co-lending agreements rarely addressing issues in detail, solutions frequently depend on the judgment and consensus of the parties and their lawyers. The courts have typically deferred to the language in agreements among lenders, in particular the decision-making procedures they establish. When entering into these agreements, therefore, it is vital that all parties understand such agreements will likely form the main, if not the only, foundation for legal judgments in the case of later disputes. The decision-making processes should be considered and established carefully.⁷

Nevertheless, it is incumbent upon the lending group's decision-making party or parties to respect the implied covenant of good faith and fair dealing. The interests of other members of the lending group should be factored in, and the decision-making party should keep all members apprised of its actions or potential actions. By keeping the decision-making process transparent, and by building consensus where possible, a lending group can head off most potential conflicts. Often, a lending group will enlist a co-agent to review and make objective recommendations on certain substantive decisions. However, in cases where the decision-making authority acts contrary to the co-agent's recommendations, this may be used as damaging evidence in future conflict issues.

Finally, the lending group should bear in mind that, once they become a property owner, it will have to make all of the decisions associated with real estate ownership--leasing, management, tenant terms and so forth, as well as the ownership structure.⁹

Intercreditor agreements

Some syndicated real estate loans involve senior and subordinate tranches within a facility that are secured by the same mortgage (A/B loan structures). Because the senior lenders and the subordinate lenders share the same collateral, the respective priorities and rights of each group of lenders must be set forth in an agreement between such parties. When various classes of lenders are involved in the capital stack, multiple intercreditor agreements may be required. Because the priority and control over the claim against the mortgage collateral is instrumental to each lender's underwriting, the intercreditor agreement is often heavily negotiated.

By empowering senior lenders at the expense of subordinated lenders' ability to influence or oppose proposals, intercreditor agreements reduce decision-making costs in the event of default. However, it is possible for an investor to exploit this imbalance, increasing its own return by damaging other creditors. When considering intercreditor agreements that waive or assign bankruptcy rights, courts are forced to weigh the benefits to the agreement's signatories against the potential for harm to subordinated creditors and non-signatories.¹⁰

Second-lien lenders face a host of other considerations unique to their status. In particular, they may become a "silent second" by agreeing contractually to refrain from exercising some or all of their rights as secured creditors. As identified in one paper, the key elements usually included an intercreditor agreement which pertain to "silent second" terms are:

- "Prohibitions (or limitations) on the right of the second lien holders to take enforcement actions, with respect to their liens (possibly subject to time or other limitations)

- Agreements by the holders of second liens not to challenge enforcement or foreclosure actions taken by the holders of the first liens (possibly subject to time or other limitations)

- Prohibitions on the right of the second lien holders to challenge the validity or priority of the first liens

- Waivers of (or limitations on) other secured creditor rights by the holders of second liens"

Defaults and payment priorities

The syndication documents typically specify both a pre-default and post-default waterfall. For A/B loan structures or senior/subordinate note structures, the senior group will be paid first. The subordinate group has taken on more risk by being subordinated to the senior group and will not be paid until after the senior group is fully repaid. Therefore, the subordinate group is usually entitled to collect a higher interest rate in exchange for taking on such risk. Losses of principal and interest due to a default can also be allocated among the senior and subordinate groups. In most cases, the losses will be allocated first to the subordinate group and then to the senior group.

Although the lead lender typically has wide latitude in addressing loan defaults, limitations still exist. Certain provisions of the loan documents may require a prescribed vote before the lead lender can take action. In other cases, remedies may need to be effected within a certain time period lest the lead lender be deemed to have, through inaction, waived enforcement rights or accepted a de facto loan modification. Participation and co-lending agreements may also restrict the lead lender's options after foreclosure occurs.¹² During this period, several possible "outs" may allow the lead lender to cede its lead lender duties, including a purchase option or a buy-sell option.¹³ Each specific contract must be considered and interpreted to determine what, if any, approvals may be needed before action can be taken.