Who Treats A Non-Recourse Loan As A Full Recourse Loan? Your Uncle Might.

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We very much doubt that the Internal Revenue Service took note of our the blog posting that follows, but on April 15, 2016, two weeks after we wrote about the significant change to the tax treatment of non-recourse carve-outs, it published a “backtracking,” some might call it a reversal, of its earlier position. You can see how it essentially reversed its earlier position by clicking: HERE.

So, the text that begins in the paragraph below the shaded one is mostly of historical significance, hopefully only an aberration. Nonetheless, we leave it posted not only to preserve history, but also for how it explains the effect of “recourse debt,” an arcane topic.

Here is the latest position of the Internal Revenue Service, as of March 31, 2016:

If a partner’s guarantee of a partnership’s nonrecourse obligation is conditioned on the occurrence of certain “nonrecourse carve-out” events described below, the guarantee will not cause the obligation to fail to qualify as a nonrecourse liability of the partnership … until such time as one of those events actually occurs and causes the guarantor to become personally liable for the partnership debt under local law.

If a partner’s guarantee of a partnership’s nonrecourse obligation is conditioned on the occurrence of certain “nonrecourse carve-out” events described below, the guarantee will not cause the obligation to fail to qualify as qualified nonrecourse financing … until such time as one of those events actually occurs and causes the guarantor to become personally liable for the partnership debt under local law.

Today’s blog posting was written with more than a little trepidation. Before we reveal its topic, Ruminations needs to emphasize two of our recurrent themes. The first is that the prime skill in counseling clients or bosses is not to know the answer, but to figure out the question – to identify possible issues, problems or opportunities. With the question in hand, most answers are easily found. Without knowing the question, the answer is useless even if in your own head.

The second highlighted theme is that you don’t need to know all of the answers or even all of the questions if you have an expert source available to you. We’ve touted the need to have a “Rolodex” (for those more recently arrived on Earth, that’s a trademark for a conveniently arranged set of cards holding names and contact information for easy retrieval). Your Rolodex should have contacts for construction issues, utility issues, insurance issues, and whatever other experts you can gather in your data base. After wading through the labyrinth of today’s technical and boring posting, you’ll want to find one or more tax experts to add to your Rolodex, probably a tax-focused accountant and even a (business) tax attorney. Today, our sole mission is to sensitize readers to a narrow tax issue brought to mind by an October 15, 2015 Tax Memorandum from your friend and ours, the Internal Revenue Service. Yes, there will be a useful, but (probably) esoteric, “fact” revealed someplace near the end of today’s posting. But, that is only to scare readers into yielding up their egos and get better connected with experts. [Read more…]

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Bargaining Power: If You Don’t Ask, You’ve Already Got Your Answer. It Is: “No.”

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In the course of preparing last week’s blog posting about small (bargaining power) tenants being entitled to assurance that their leased spaces are as physically accessible and visible as when the lease was signed, we got to thinking about “why this comes up in the first place.” No, we weren’t thinking as a philosopher might think; we were much more at the nuts and bolts level. Basically, we framed the question thusly: “What do tenants look for in landlord-form leases that just don’t seem to be there?” Today, we aren’t listing things that are commonly in such lease forms, but written in a way that should make a tenant unhappy. We’re talking about items tenants need to ask for. [This isn’t bait and switch our part.. We’ll tie this in with today’s blog posting’s title later.] [Read more…]

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But, The Lease Guaranty Had All Of The Right Words – What Happened?

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“I guarantee the full performance of the Lease by the Tenant. This Guarantee is absolute and without any conditions. … This guarantee will not be affected by any change in the Lease whatsoever, including, but not limited to any extension of time or renewals.” “The Guarantor further agrees that this guaranty shall remain and continue in full force and effect as to any renewal, change or extension of the Lease.”

Those were two ways in which two different landlord’s forms of guaranty were intended to give the landlord comfort that a guarantor would not weasel out of the guarantee based upon amendments, extensions, etc. to the guaranteed lease. They didn’t work.

What went wrong? Basically, including such language in a guarantee helps make the guarantee bullet-resistant, not bullet-proof. [Read more…]

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Mortgage Loan Term Sheets Are So Long; So, Why Are They Missing All Of The Provisions Borrowers Should Be Looking For? Part 2.

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Last week, we started a list of loan terms that regularly seem to be left out of Loan Term Sheets prepared by lenders despite those term sheets using up an entire tree for what is included. If you didn’t see that posting and you are compelled to start at the beginning of our Ruminations, click HERE to start at the beginning. Today, we continue and then conclude our list. Don’t confuse “conclude our list” with “conclude the complete list,” because we know the limits of our ability and experience. A further caveat would be – every deal has its own factors to consider, but most loan term sheets attempt to fit all shape pegs into a round hole.

So, here we go with the rest of our list of “missing” terms in the common Loan Term Sheet:

Cash Management Accounts. If a borrower can avoid a “clearing account” (essentially, a “lock box”), it should. For those unfamiliar with how those work, the lender “owns” an account at the bank you choose and all rent checks go to that account. Your bank agrees, with the lender, to “sweep” all money out of that account every night and put the swept funds in your own account. That is, it will do that sweep until the lender notifies the bank to sweep the money into the lender’s regular bank account (at whatever bank the lender uses). That allows the lender to interrupt the cash flowing to the borrower when the lender thinks a “Trigger Event” has occurred. A Trigger Event could be the borrower’s default or it could be that the rental income, though exceeding the debt service payments, doesn’t exceed it by enough. It could also be when a key tenant has left the property. In fact, it could be anything the loan documents say it is, including receipt of a report of alien abduction signed by two adults. Though the last example is unlikely, it does illustrate that if the Loan Term Sheet calls for a cash management account, it should state what the Trigger Events would be. [Read more…]

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Mortgage Loan Term Sheets Are So Long; So, Why Are They Missing All Of The Provisions Borrowers Should Be Looking For? Part 1.

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 We think it’s called “document creep.” When documents were hand-written, they were pretty short and the world survived. Then, along came the typewriter, and a three page mortgage and a five page lease were probably seen to be somewhat burdensome by the party most burdened. Then, as typing got faster, the documents got longer. Rudimentary word processors, such as memory typewriters, made it easy to go even longer. Modern word processing allows for 100-plus page mortgages, leases, and other documents. Yes, now, we’re able to craft super-long documents “in a single bound.”

Even the term sheets for loans have succumbed to this “document creep.” A dozen or more pages? – No sweat. Doesn’t this benefit everyone, having a complete set of loan terms right up front so that the lawyers don’t wind up negotiating important items while the “outside closing date” looms close? Wish that were the case, because, as lengthy and detailed loan term sheets are getting (call them commitment letters, loan applications or whatever), for some reason they don’t exactly cover all of a borrower’s concerns. Ruminations doesn’t mean “all of a ‘particular’ borrower’s concerns.” We mean all of the concerns that any (or every) borrower should or does have. Like what, you ask? Like, the kinds of items we’ll be covering this week and next (and maybe even the one after that). [Read more…]

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Here Are Some Ways To Limit A Lease Guaranty… Including By Being A “Good Guy.”

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Last week we ruminated over some of the legal aspects of lease guaranties. Characterizing them as “legal” issues doesn’t do proper justice to the subject because all legal issues are, in fact, business issues as well – they are a proxy for talking about allocating risk. Nonetheless, lease guaranties implicate an even more obvious business issue – will there be limits on the guarantor’s liability, and if so, what will they be? This posting will explore some of the possibilities. On the other hand, the relative bargaining power of the parties will determine how useful the following ideas will be. [Read more…]

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What’s To Negotiate About a Lease Guaranty?

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At the outset, let us offer a premise – when someone agrees to give a guaranty, it is expected that other than specific, agreed-upon business or financial limits, the guaranty will be “come heck or high water.” Absent some specific agreement to the contrary at the time the deal is made, this means that a lease guaranty is to be one of payment, not of collection, and is to be unconditional (whatever those things mean). The words of art are: ‘absolutely, irrevocably, and unconditionally.” Basically, what has been bargained for is that if the tenant doesn’t pay or perform, the guarantor will be just as liable as if had been the tenant itself.

This doesn’t mean there aren’t a lot of items that are reasonably up for discussion, only that when one agrees to execute a lease guaranty, there isn’t supposed to be a trap door to sneak out through. On the other hand [Read more…]

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