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TRANSCRIPT
© Freddie Mac
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
TAH Seller Workshop – SPE Equity Requirements 3
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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
TAH Seller Workshop – SPE Equity Requirements 5
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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
TAH Seller Workshop – SPE Equity Requirements 6
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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…
TAH Seller Workshop – SPE Equity Requirements 7
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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
TAH Seller Workshop – SPE Equity Requirements 8
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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
TAH Seller Workshop – SPE Equity Requirements 9
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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…
TAH Seller Workshop – SPE Equity Requirements 10
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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
TAH Seller Workshop – SPE Equity Requirements 11
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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
TAH Seller Workshop – SPE Equity Requirements 12