Equity Partners Ownership Restrictions without being vetted

[Jeff Greenberg]

In every Syndicated deal I have been involved in, the lender requires the equity partners to be vetted, and be a signer on the loan, if their overall ownership is above 20-25%.

1. I would like to hear a lenders point of view as to why this is required.

2. If a couple were to invest together, their ownership was over the 20-25%, so they decided that they would come in individually, coming in below the ownership limit. Would a lender (I know all lenders are different)feel that they are trying to pull one over on the lender or just playing by the rules that the lender has provided.

[Bill Gulley]

Jeff, in any business relationship a lender looks to the principles for repayment under several aspects (even in non-recourse financing). Management is one of the aspects, any partner that has a significant role may influence operations. The decisions they make or the actions they take will usually be different if they are on the hook. Borrowers are more accountable.

In some entities, a member or stockholder may have an equity position attached to assets, rights to employee contributions, pay, benefits or internal arrangements that may limit the ability to liquidate assets or attach accounts, such arrangements are generally provided among those having a major or significant interest. Having all such parties on the hook makes collection activities against such interests easier.

Another aspect is simply to reduce risk, loans are made on a joint basis giving a lender the option of seeking repayment from the easiest source of funds or assets that might be available. The more on the hook the better. Collections cost money and time, just because one borrower may have greater wealth doesn't mean they are the easiest to collect from, to the contrary. If partners end up fighting between themselves as to liability for failures the partner with the greatest wealth may not be the responsible party or they may avoid liabilities. While such fights are rather detached from a lender's ability to foreclose or collect, courts can one to pay for a loss or indemnification that can make collections more difficult. You never know how the sheets will be split between parting partners.

Avoid potential issues, hold all major players responsible, enforce terms jointly and severally, take the position to collect amounts due from the most economical path in a timely manner.

It's prudent lending practice, failing to do so is poor management identified by regulators for insured institutional lenders if major players are not held responsible. IMO :)