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LLC OPERATING AGREEMENTS AND PARTNERS... If you signed an LLC operating or partnership agreement prior to January 1, 2018, it may need to be amended to...In The News
August 22, 2016 • 4 min read
Perhaps you are an individual member, or your personal trust is a member, in a limited liability company that owns a performing commercial real estate asset.
Let’s say the LLC has made an application with a lender for a loan to acquire or refinance an existing loan on the real estate.
Unless you are the manager or managing member of the LLC, you may have little or no input into the terms of the guarantee of the prospective loan that you will be required to give.
Even if you assume the role of manager or managing member, your focus may be more on interest rate, term, amortization and required financial covenants.
However, in the event of a loan default, the loan approval will generally require full recourse to key principals of the LLC (that’s you!).
So what do you need to focus on in the loan commitment or proposed term sheet?
If the prospective lender will be originating the loan to hold in its portfolio as an asset, most likely you (or your personal trust if you have transferred significant assets to it) or both will be required to give an unconditional guaranty of payment.
If the LLC does not satisfy its obligations under the loan documents to repay the loan, the lender will want the ability to recover all sums from you and, if there are other guarantors, from them on a joint and several basis.
That means that even if you are only a part owner of the LLC, you may have to pay the entire debt.
To protect against this you should request that the lender cap your exposure either as a maximum amount of or a percentage of principal due as of the event of default triggering your payment obligation.
If the lender will not provide a loan on that basis, you should require a contribution agreement from your fellow LLC members. If you have to pay the lender more than your percentage interest, the other members of the LLC will be required to reimburse you for the overage. Of course if the other members are not as creditworthy as you are, you have a problem.
If the prospective lender originating the loan intends to sell the loan into the securitized market — i.e. the LLC’s loan will be put placed in a pool and sold to investors — your guaranty will be significantly different.
The lender will require significant control over the cash flow as well as the condition of the commercial real estate itself.
Your guarantee will have two separate components. You will be typically responsible for losses suffered by the lender arising out of:
All of the foregoing are commonly referred to as the “bad boy” covenants.
So far, you as the guarantor are quite comfortable that the manager of the LLC would never do any of those things and it is only the actual loss suffered by the lender that you have to worry about.
However, you as the guarantor may be liable for ALL of the debt to the lender if
Also, if you have signed an indemnity agreement relating to the environmental conditions of the real estate, you may have liability beyond the amount of the loan.
You need to also review the requirements regarding guarantor financial covenants and reporting.
Most lenders will require a guarantor net worth covenant and a liquidity covenant.
Determine at the loan commitment, term sheet or application stage how those financial covenants are calculated.
Can you include joint assets with a spouse? Can you count retirement assets? Determine what financial reporting will be required. Will you be required to provide a global real estate holding report? What is the format for personal financial statement reporting? What are the deadlines for providing these reports and copies of your tax return?
Whether you are the manager of the LLC or merely a member of the LLC, it is extremely important to understand at the loan commitment, term sheet or application stage what your obligations as a guarantor will entail.
In the discussions surrounding the structure of the loan, none of the loan parties ever believe that the guarantors will be called upon to make the lender whole. It is extremely difficult after the loan is approved or the terms are agreed upon to change the guaranteed obligations.
Our attorneys will provide a collaborative, thoughtful approach to your legal needs. We look forward to connecting with you.