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Pricing LLC Membership Interest

Pricing LLC Membership Interest

11

July, 2018

.

Thomas Howard

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Secured lenders should understand the membership interest in a borrower’s LLC as collateral.

Suppose a borrower claims to have a successful limited liability company, LLC.  He claims that his membership interest in this LLC is valuable collateral that he wants to pledge to obtain another commercial loan.

How should the commercial lender approach valuation of the LLC’s membership interest in determining how much to lend against it?  The answer is not as straight forward as many believe because lots of restrictions against the assignment of LLC membership interests exist not only in statute, but also in the LLC’s governing contracts.

“A distributional interest is different than a membership interest in an LLC. ”

 

Picture of Collateral with low risk

Photograph by Lorem Ipsum via Stencil

Here’s the bullet point take aways from the video above.

  • A membership interest does not mean the member owns any property of the LLC.
  • Often restrictions against the transfer of the membership interest can be found in the Operating Agreement for the LLC, or even in a state statute.
  • The distributional interest is only the right to receive distributions of profit and not engage in the management of the LLC.
  • Cap Rates are often used to value commercial real estate LLCs, but that does not mean it is so easy to value the membership interest collateral – the value is typically just the distributional interest.
  • A member’s K-1 will provide what the value of the distributional interest is.
  • Don’t just rely on the pie-in-the-sky projections of any LLC’s cash flows, confirm them before performing the calculations to arrive at a reasonable valuation for the percentage of the membership interest collateral the putative borrower wishes to pledge.

11

July, 2018

.

Thomas Howard

Follow on Social Media

Secured lenders should understand the membership interest in a borrower’s LLC as collateral.

Suppose a borrower claims to have a successful limited liability company, LLC.  He claims that his membership interest in this LLC is valuable collateral that he wants to pledge to obtain another commercial loan.

How should the commercial lender approach valuation of the LLC’s membership interest in determining how much to lend against it?  The answer is not as straight forward as many believe because lots of restrictions against the assignment of LLC membership interests exist not only in statute, but also in the LLC’s governing contracts.

 

“A distributional interest is different than a membership interest in an LLC. ”

Picture of Collateral with low risk

Photograph by Lorem Ipsum via Stencil

Here’s the bullet point take aways from the video above.

A membership interest does not mean the member owns any property of the LLC.

Often restrictions against the transfer of the membership interest can be found in the Operating Agreement for the LLC, or even in a state statute.

The distributional interest is only the right to receive distributions of profit and not engage in the management of the LLC.

Cap Rates are often used to value commercial real estate LLCs, but that does not mean it is so easy to value the membership interest collateral – the value is typically just the distributional interest.

A member’s K-1 will provide what the value of the distributional interest is.

Don’t just rely on the pie-in-the-sky projections of any LLC’s cash flows, confirm them before performing the calculations to arrive at a reasonable valuation for the percentage of the membership interest collateral the putative borrower wishes to pledge.

Uniform Fraudulent Transfer Act

Uniform Fraudulent Transfer Act

Uniform Fraudulent Transfer Act

The Third District Appellate Court of Illinois handed down a new case that is of interest to secured lenders.

The case of Pluciennik v. Vandenberg provided the first time that Illinois applied the Uniform Fraudulent Transfer Act (UFTA) and its definition of “asset” on an encumbered piece of real estate.

Plaintiffs filed a UFTA action seeking to avoid transfers of three parcels of real estate from companies owned and managed by Defendant to companies held in irrevocable trusts for the benefit of his minor daughters. Valid mortgages encumbered all the real estate transferred.

The Trial Court erred in determining, as a matter of law, that the real estate were not assets under the UFTA because they were fully encumbered because no evidence of the fair market value of the real estate was considered in granting a motion to dismiss the UFTA complaint.

“that the fair market value of encumbered property that exceeds the value of a valid lien qualifies as an asset under Illinois’s Uniform Fraudulent Transfer Act. “

“that the fair market value of encumbered property that exceeds the value of a valid lien qualifies as an asset under Illinois’s Uniform Fraudulent Transfer Act. “

Picture of Collateral with low risk

Photograph by Lorem Ipsum via Stencil

The trail court made a mistake by not taking evidence on the fair market value of the real estate transferred.

As a result, there continued to be a material issue of fact as to the reasonable value of the properties and whether, in light of the fair market value, the properties were fully encumbered.

Therefore, Illinois law recognizes the value of the asset over and above the encumbrance upon it to be subject to the UFTA.

Look at the both the fair market value, and the payoff of the debt before determining if there is a UFTA claim.

Picture of Collateral with low risk

Photograph by Lorem Ipsum via Stencil

The trail court made a mistake by not taking evidence on the fair market value of the real estate transferred.

As a result, there continued to be a material issue of fact as to the reasonable value of the properties and whether, in light of the fair market value, the properties were fully encumbered.

Therefore, Illinois law recognizes the value of the asset over and above the encumbrance upon it to be subject to the UFTA.

Look at the both the fair market value, and the payoff of the debt before determining if there is a UFTA claim.

Help I Was In a Wreck!!! When Should I Call My Attorney?

Help I Was In a Wreck!!! When Should I Call My Attorney?

What your attorney can do for you & When DO you need the Attorney with you!!

We’ve all seen people and their cars on the shoulder of the road or blocking the intersection and the police are there investigating and directing traffic around a collision. There are three times having an Attorney assisting you in dealing with a collision and helping you recover for losses to your property and your well-being.  Here are some tips on what your attorney can do for you at each of the stages of an auto collision claim.

JUST AFTER THE COLLISION:

  • Helping you get your information organized as to your insurer, the traffic collision report, and contacting the other driver’s insurer. Getting to get yourself checked out by a healthcare provider if you weren’t treated at the scene of the collision or at the Emergency Room that night. You might not realize that the stiffness and pain could only arise after your body’s adrenaline is gone.
  •  Helping you at the first contact with the other driver’s insurer as they can ask what seems like a simple question to get you to waive your claim. An example; asking you if you were hit by a Ford F-150 and you’re not a truck person so you don’t know how to answer. Your attorney will ask if they mean the vehicle belonging to their insured (the other driver) and then their little trick has failed.
  • Negotiating on the property damage to your vehicle; either insurer (yours or theirs) will try to minimize the damages and value of your vehicle. Your attorney will be able to make sure your vehicle is safely repaired or if the vehicle is “totaled” negotiate the best car value to enable you to replace your vehicle.