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As debt funds continue to expand their footprint in the European commercial real estate (CRE) market, the use of back-leverage – long established in the US – is increasingly influencing how transactions are structured and funded by both US and European debt fund lenders.
The appeal of back-leverage to all stakeholders is evident. For banks, intermediating through back-leverage rather than lending directly at the asset level can deliver more favourable capital treatment while enabling greater exposure to the CRE sector in a streamlined manner. For debt fund managers, it enhances returns and supports larger-scale lending. And for CRE borrowers, it provides access to required funding without resorting to senior/mezzanine layering.
This article marks the first instalment in a five-part series from the Ropes & Gray Real Estate Finance team, exploring back-leverage in the European CRE context. Across the series, we will examine key structures, practical considerations, negotiation dynamics, and emerging market trends.
In this opening piece, we offer a high-level overview of the principal back-leverage structures currently shaping the CRE financing landscape. Please note that, in the context of referring to CRE repurchase facilities, we use "buyer" to refer to the lender and "seller" to refer to the borrower.
- UK / Europe: Loan-on-loan facilities remain the predominant form of back-leverage across the UK and continental Europe, even as the financing toolkit continues to broaden. In a typical arrangement, a debt fund originates an asset-level CRE loan secured by the underlying real estate using a special purpose vehicle (SPV). The SPV lender then enters into a facility agreement with a back-leverage provider (usually a bank), under which it borrows funds to finance a portion of the CRE loan it has made or is looking to make. In effect, the back-leverage provider finances or refinances part of the SPV's CRE loan exposure, while the SPV remains lender of record on the underlying asset-level CRE loan. The SPV gives security over the asset-level CRE loan to the back-leverage provider.
- US: By contrast, US market practice is anchored in repurchase, or "repo," structures governed by a Master Repurchase Agreement (MRA) – though the use of loan-on-loan structures is well established in the US. The mechanics of an MRA differ from a loan-on-loan facility: the debt fund, again acting through an SPV, originates the underlying CRE loan and remains lender of record but is deemed to sell that loan to the back-leverage counterparty, with an agreement to repurchase it on specified terms and dates in the future.
Two features make these structures particularly attractive to US banks. First, repurchase facilities benefit from "safe harbour" protections under the US Bankruptcy Code, meaning the assets deemed to have been sold sit outside the seller's insolvency estate and are not stayed in the event of its bankruptcy. Second, margin maintenance and mandatory repurchase provisions typical in MRAs provide lenders with more efficient remedies following an event of default or asset impairment. Together, these features promote liquidity, efficiency and competitive pricing in the US market.
- Alternatives. Some providers employ private securitisation-style structures involving tranching, risk retention and enhanced reporting obligations. In the UK, English-law repos documented under the Global Master Repurchase Agreement (GMRA) have become an alternative to traditional loan-on-loan facilities. Some lenders also structure back-leverage arrangements as total return swaps.
- Market trends. In Europe, the choice between a repo and a loan-on-loan structure increasingly depends on fund preference and the internal policies of back-leverage providers. US banks often favour MRAs that mirror their domestic approach, prioritising operational familiarity and portfolio consistency. European counterparties – particularly those with US headquarters – generally accommodate these preferences where possible, although local law, tax and regulatory nuances continue to influence structure selection.
The next article in this series will explore the practical and legal considerations of back-leverage in greater detail, including key operational and enforcement distinctions between repo and loan-on-loan structures.
If you are navigating, or considering, back-leverage as part of your CRE financing strategy – whether in the US, across Europe, or on a cross-border basis – the Ropes & Gray Real Estate Finance team is here to help.
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.
