In an equity participation transaction, a "lender" or its subsidiary may acquire an interest in the "developer-borrower's" land and thus share in any profits. The lender may obtain stock in a corporate developer or it may enter a land-owning partnership or joint venture with the developer. The lender may then make a mortgage loan to the entity of which it is a member.
Ordinarily, where a general partnership, limited partnership or joint venture borrows money from one of the general partners and partnership land is mortgaged a possible lack of priority may arise under state statutes and under the provisions of the Bankruptcy Code. If the mortgage remains unpaid when the partnership becomes insolvent, the general creditors of the partnership will have priority over the mortgage and must be paid before the mortgagee is paid. This is an unusual situation, since normally a mortgagee has priority over unsecured creditors, but partnership law established that a general partner has unlimited liability for partnership debts.
Consequently, any loan policy issued in favor of a general partner making a mortgage loan to his partnership or joint venture would require the showing of an appropriate exception.
Reminder: If a limited partner is lending, state law must be consulted to determine if such a loan is permitted.