Navigating Vendor Take-Back Mortgages: Five Key Considerations

Creative dealmaking is essential to keep transactions moving in today’s dynamic commercial real estate market. One increasingly popular strategy is the use of vendor take-back mortgages or VTBs. A VTB is a financing arrangement whereby the vendor lends money to the purchaser, allowing the purchaser to pay only a portion of the purchase price on closing without needing to borrow money from a third-party lender.

Here are five key considerations for successful VTB arrangements:

1. Using VTBs Effectively. VTBs can benefit both buyers and sellers in certain situations, including as a buffer against rising or uncertain interest rates. VTBs are often used when traditional financing is challenging to obtain in time for closing or when the seller wants to take financing off the table as a purchaser issue.
2. Typical VTB Terms. Terms may vary, but generally: (i) interest rates are fixed at a rate lower than current bank rates, (ii) amortization periods are shorter than traditional loans, (iii) payments are interest-only with a lump sum due at the end, and (iv) repayment is permitted without bonus or penalty.
3. VTB Market Changes. In the volatile interest rate environment of recent years, VTBs have undergone two significant shifts: terms are lengthening, and VTBs are increasingly permitted to be second mortgages or permit a second mortgage. As a result, VTBs are becoming more central to the transactions in which they are deployed, intensifying the need for careful negotiation. 
4. Seller Considerations: When selling with a VTB, approach the deal like a traditional lender by requiring forms of legal opinions, officer’s certificates and resolutions as a typical lender would in a conventional financing transaction, and consider: 
   • With multi-year VTB terms, early repayment is unlikely; will additional collateral security be required? 
   • If the VTB will be a second mortgage or permits one, should you negotiate conditional terms to secure an intercreditor agreement, if needed? For more on this topic, read our March 2024 Blakes Five Under 5 article: Intercreditor Agreements: Key Areas of Negotiation.
   • Will you enforce more stringent operating covenants for transactions involving an operating business, such as financial and insurance reporting and debt-service coverage ratios? 
   • Do you need to buy a lender’s form of title insurance, particularly if the purchaser will be buying an owner’s policy (which decreases the incremental cost of the lender’s policy)?
5. Key Takeaways: Consider if any heightened organizational anti-money-laundering (AML) or anti-corruption matters may be triggered by lending money to the purchaser, not just selling real property, and determine what transfer scenarios would be permissible, including the terms and conditions. As VTBs become longer-term, the possibility of the purchaser selling all or part of the property and wishing to have the buyer assume the VTB becomes more relevant.

Have more than five minutes? Contact any member of our Commercial Real Estate group to learn more or view our webinar on this topic.