How does a wraparound mortgage work on a commercial property?

Wrap mechanics, due-on-sale risk, and where wraps work in CRE

Mechanics: the buyer purchases the property and signs a wraparound (junior) note to the seller for the purchase price minus the buyer's down payment. The seller's existing senior mortgage remains in place (and typically remains in the seller's name as borrower of record). The buyer pays the seller a monthly amount that includes the underlying senior's monthly debt service plus an additional spread. The seller uses the buyer's payment to service the senior and keeps the spread.

Due-on-sale risk: virtually all modern CRE senior loan documents include a due-on-sale clause that allows the senior to call the loan upon transfer of the property without senior consent. A wrap is a transfer; doing it without senior consent typically triggers default and acceleration. Senior consent is usually required, and is typically refused on standard CRE loans because it shifts the credit profile without underwriting.

Where wraps actually work: assumable senior loans (HUD 223(f), HUD 232 LEAN, certain agency loans, some life-co loans with assumption rights) are assumable. A wrap leaves the seller as borrower on the senior and needs the senior lender's consent to that structure. Consent to an assumption is a different structure. Consent to a wrap is uncommon, and a wrap without it usually defaults the senior. Non-recourse senior loans with weak due-on-sale provisions in older portfolios may permit a wrap with consent. Most other contexts, bank, CMBS, modern agency, do not.

Wrap pricing: the spread the seller earns on the wrap (buyer's note coupon minus the senior coupon) is the seller's economic return for retaining payment risk on the senior. On an assumable senior at 5.5% with a buyer paying 8% on the wrap, the seller earns 250 bps of spread on the wrapped balance, but takes on the credit risk of the buyer defaulting. On a nonrecourse senior, the seller's exposure is whatever the documents still impose, including carve-outs. It is not automatic personal liability for the full balance. Material risk; counsel review required.

Documentation: wrap structures use a wraparound mortgage and note plus the senior lender's consent to the wrap. Consent to an assumption is a different structure. Some structures use a land contract or contract for deed instead of a deed conveyance. Each variant has different default, cure, and tax consequences. Not legal advice, wrap structures must be reviewed with state-specific counsel before signing.