Borrowers, Their Structures and SPEs

2017 Targeted Affordable Housing Seller Workshop

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Joshua SchonfeldManaging Associate General

Counsel - MF Real EstateLegal

Michael PattersonVice President

Underwriting and Credit Specialty Products

Presenters

TAH Seller Workshop – SPE Equity Requirements 2

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Complex Borrower structures

SAEs vs. SPEs

Recycled Entities work

Due Diligence requirements

Borrowers, Their Structures and SPEs

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Their Structures

TAH Seller Workshop – SPE Equity Requirements

ABC APARTMENTS LLC(Owner/Borrower)

Guarantor(s)

ORGANIZATIONAL STRUCTURE(POST-CLOSING)

ABC MANAGING MEMBER LLC

A limited liability company(Managing Member)

__% Interest

ABC ACQUISITION LLC,A limited liability company

(Investor Member)99.99% Interest

Manager___% Interest

Sole Member___% Interest

___% ___% ___%

4

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Required to own only the subject property

Covenant to –» Not engage in any other business or activity other than operating the property

» Not own, lease, acquire, manage, develop, or improve any property other than the property

» Maintain its assets in such a manner as it is costly or difficult to determine which assets are theirs

Single Asset Entity (SAE) Basics

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Borrower agrees to conduct itself in a way that will insulate it from bankruptcy and consolidation

Isolate the property and its rental business

Has one purpose

Is solvent at closing

Should stay solvent

Unaffected by other, even related business entities

Single Purpose Entity (SPE) Basics

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SPE is NOT -

An individual

General Partnership

A Trust

Usually not a » Limited Liability Partnership

An SPE is -

Limited Partnership

Corporation

Delaware Single Member LLC

Multiple member LLC

An SPE Is…

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Continue its solvency» Limit trade payables

» Use only its bank checks and stationary

» Preserve its good standing

» Observe its organization formality

» Hold all assets in its name

» Only arm’s-length agreements with partners or affiliates

– on commercially reasonable terms

» Maintain its books and records apart from another person or entity

Covenant – Think - Promise

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File its own tax return

Do business solely in its name

Maintain adequate capital

Pay its debts from its own assets

Allocate shared expenses reasonably

Maintain sufficient employees

Covenant – Think - Agreement

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Own another subsidiary

Wind up, dissolve, terminate, liquidate, change its legal structure, transfer interests

Merge or consolidate

Guaranty debts of another

Make loans

Permit others access to bank accounts

Don’t…

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SAEs: Below $5M

SPEs: At and above $5M

SPE Equity Owners: $25M or above» Required on Managing Member or General Partner (GP) side

» Not Required for Co-GP entities who are part of the ownership structure solely to qualify for tax abatement

Springing Members –» Only on Single Member LLC

Non-Consolidation Opinion» Required over $25M on cash deals – heading for CME execution

» Not required for TELs or bond enhancements

When Required

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No» Passthrough Entity Principals

» Intermediate Borrower Principals

Yes» Borrower – the SPE

» Guarantor

» First-Level Principal from Borrower

» Final-Level Principal from Borrower

» Non-U.S. Equity Holder

Whose Info Is Needed?

What Is Needed? Form 1115 – Borrower/Borrower Principal Certificate Form 1116 – Real Estate Owned List Financial Statements – Balance Sheet and Income

Statement Credit Report OFAC SDN / FHFA SCP / Exclusionary Lists

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