CRE Back-leverage: Practical And Legal Considerations

This second instalment of our five-part series examines the practical and legal considerations shaping back-leverage transactions in Europe. Building on the structural overview in Part One (see here), this article focuses on how different frameworks operate in practice and how these choices align with a manager's investment objectives, capital structure and risk profile.

This article provides a high-level summary of the principal factors debt fund clients typically weigh when selecting between the two most common forms of back-leverage: repurchase arrangements governed by a Master Repurchase Agreement and loan-on-loan facilities. It is not intended as an exhaustive guide, but rather as a practical overview to assist sponsors and managers in identifying which approach may best support their broader financing strategy.

• Discretion and control: MRAs governing repo structures are typically used to finance a pool of CRE loans, which are treated as a cross-collateralised portfolio. Operationally, these arrangements tend to afford the back-leverage provider greater discretion and flexibility – such as approving new asset onboarding, accommodating multiple currencies, permitting future advances, setting conditions precedent to funding, and determining market value for margin purposes. That said, many of these positions are negotiable, particularly for stronger debt fund counterparties acting as repo sellers.
• Enforcement and security: Enforcement dynamics also differ materially. Under an MRA, the buyer is treated as the owner of the financed asset, which can, in principle, simplify liquidation and accelerate recoveries. However, for assets outside the US, local law may not always recognise the MRA security construct without additional support. In practice, buyers often require a secondary layer of security governed by the law of the asset's jurisdiction to ensure effectiveness on enforcement.
• Procedural protections: A classic MRA repo structure affords fewer procedural protections to the back-leverage borrower than a loan-on-loan facility with an assignment of rights. Under English law, certain safeguards apply to obligors when security is enforced, offering borrowers an additional layer of protection compared with the US repo framework.
• Commercial terms and pricing: These legal and operational asymmetries are reflected in pricing. Because MRAs generally favour the back-leverage provider, repo sellers can often negotiate more competitive terms than would be available under a loan-on-loan facility. Sponsors therefore tend to assess not just the headline rate but the broader procedural, legal and commercial context accompanying each approach.
• Securitisation: Finally, potential securitisation treatment – together with associated risk-retention and reporting obligations – requires careful analysis. These issues are highly fact-specific and often decisive in aligning a financing with regulatory expectations and investor reporting frameworks. They may ultimately determine whether a back-leverage arrangement should, or should not, be structured as a securitisation.

The next article in this series will explore the key negotiation points that typically arise when documenting back-leverage structures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.