Commercial Real Estate Financing 2017

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1 REAL ESTATE LAW AND PRACTICE Course Handbook Series Number N-652 Commercial Real Estate Financing 2017 Co-Chairs Steven R. Davidson Joshua Stein Everett S. Ward To order this book, call (800) 260-4PLI or fax us at (800) Ask our Customer Service Department for PLI Order Number , Dept. BAV5. Practising Law Institute 1177 Avenue of the Americas New York, New York 10036

2 19 Checklist LLC Issues in Secured Real Estate Lending Thomas D. Kearns Olshan Frome Wolosky LLP If you find this article helpful, you can learn more about the subject by going to to view the on demand program or segment for which it was written. 545

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4 Compliance by the borrower s legal structure with the lender s legal and underwriting standards is crucial for secured lenders. This checklist reminds borrower s counsel of the key elements in LLC agreements and supporting documentation. The terminology used matches the Delaware LLC statute. Item Comments 1. Organization Chart A graphical chart showing the structure of the borrower and its members and managing members typically showing ownership up to the ultimate beneficial owners. 2. Certificate of Formation of Borrower and any Managing Members Lenders require the actual certificate filed with the Secretary of State. Some Lenders will accept a copy of the certificate and evidence of filing. Others require freshly dated certified copies from the Secretary of State. 3. Good Standing Certificates A certificate for the borrower and its managing members with a recent date from the jurisdiction of organization and from the state in which each entity is qualified to do business, i.e. the state where the property is located. 4. LLC Agreements The agreements governing the operation of the borrower and its managing members and sometimes each nonmanaging member of borrower. 5. Consents Which members of borrower need to consent to the loan? If consents are required from members who are entities, what consents are needed in those entities? 6. SPE Covenants Loans require that the borrower and sometimes the managing members of the borrower covenant to only own this particular property and take steps to insulate the Company from a bankruptcy of an affiliate, i.e. the entity is a special purpose entity or SPE

5 Once the SPE covenants are negotiated, the SPE s LLC Agreement must be amended to incorporate the covenants. For example: So long as [Bank] is a mortgagee of the Property, the Company shall not engage in any business or activity other than the ownership, leasing and sale of the Property and any activities incidental thereto. Prepare in advance if a dealing with a multi member with a tough amendment clause or if the LLC is recycled. 7. Recycled SPEs For exchange transactions designed to qualify under Section 1031 of the Internal Revenue Code, be sure to clear the old LLC Agreement with the lender well in advance. Since 1031 requires the same entity be the exchangor, the old SPE provisions will need to be amended. Confirm that the managing members have the authority under the LLC s purpose clause to acquire and operate new property. 8. Transfer of Membership Interests 9. Certification of Membership Interests The loan covenants always restrict transfers of membership interests in the borrower. Those covenants also frequently apply to transfer of membership interests in the members of borrower. Borrower s counsel and counsel to unaffiliated members should review those restrictions and compare them to the buy/sell provisions in the LLC agreement so that a member exercising any buy/sell right does not trigger a default under the loan. Most modern buy/sell provisions have an express disclaimer that the exercise of any such right is subject to the terms of any loan. The terms of mezzanine loans, i.e. loans secured by membership interests in the property owner or a parent of the property owner, typically require that the membership interests be evidenced by certificates which are delivered to lender and held as collateral. UCC Articles 8 and 4 548

6 9 provide additional comfort to the lender for certificated interests. 10. UCC Searches Lenders typically require searches of UCC filings to determine if any principal member has pledged its interest. 11. Borrower s Counsel Opinion If you believe the above items are academic, keep in mind that many of these items are crucial for borrower s counsel s closing opinion. A full analysis of the LLC Agreements for all members and managing members is crucial for the due execution, enforceability and no other consents opinions typically demanded by lenders

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