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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. ”

 

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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

UFTA Lawyer - Tom Howard

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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.