Real Estate Reserves October 2021 – Limited Recourse Finance Series, Part 4: Other Common Problems in Limited Recourse Structures | Cadwalader, Wickersham & Taft LLP


In the final part of this four-part series, we explore some of the common issues that can arise in limited-recourse structures, as well as ways to address or mitigate risks and costs.

Intra-group transfers – Stamp duty property tax (SDLT)

For some portfolio companies, one of the due diligence issues for the lender is whether any properties and / or companies have been transferred intra-group as a result of a corporate restructuring, or if it is planned to do so during the term of a loan. Although intra-group property transfers are generally not subject to UK stamp duty on the basis that the SDLT intra-group relief applies[1], this relief would be subject to recovery when (among other things) the transferee leaves the SDLT group within three years of the transfer of ownership.[2]

From a lender’s perspective, there are two practical methods of dealing with the risk of clawing back any SDLT relief:

  1. that there are adequate restrictions in the documentation of the facility to ensure that any restructuring, or any debtor or member of the same tax group leaving the SDLT group of the Borrower, is prohibited should such action result in a withdrawal of the reduction of the SDLT group; and
  2. Any enforcement action which may constitute a breakdown of the SDLT Group, and thus trigger the SDLT recovery, must be carefully considered and adequate measures must be included to mitigate the risks as well as the potential liability.

The clawback provisions of the SDLT group relief are not reflected in the stamp duty provisions applicable to intra-group share transfers, but the reliefs are broadly similar in other respects. When partnership entities are involved in a request for SDLT group relief (whether the interest of the partnership is itself transferred or there is a partnership within the group), special care must be taken to avoid the loss of intra-group relief which could jeopardize the economics of limited recourse financing.

Consolidation of the tax group

It is common for group companies to form a UK corporate tax group. Tax consolidation allows members of the same tax group to distribute redemption gains and losses among group members on the basis of the current year. Although each member of the tax group is subject to its own primary corporate tax obligations, when these tax obligations are not paid by a particular member, then it is possible for HMRC to recover that tax as a secondary obligation. from another member of the group.

Since the nature of limited recourse funding is to ensure that all assets and liabilities are confined to the same borrower group, the promoter may therefore wish to ensure that the borrowing entities are segregated from the rest of the group for purposes. tax consolidation, in order to avoid any cross-liability that may arise.

If, however, the finance group is part of a larger tax group, one of the liabilities that may require investigation by the lender is the possibility of unpaid liabilities from members of the group outside the ring-fenced security structure. The lender may wish to include covenants and other collateral against this potential risk.

Shareholder Safety – Some Common Considerations

As discussed in Part 3 of this series, it is often expected that the holding company of the Borrower SPV will provide a guarantee on (i) the Borrower’s shares and (ii) to the extent applicable, any shareholder debt. . The collateral on these two assets is to ensure that, upon execution, the lender has an option to undertake a sale of the Borrower’s business, free from the debt of the subordinate sponsor.

From the sponsor’s point of view, given that the guarantee is only provided for a very specific set of assets (shares of the Borrower SPV and debt linked to this SPV), it must be ensured that recourse to the shareholder is limited to these only assets, and not beyond. Therefore, shareholder security is often one of the most negotiated documents.

Some of the provisions that can be negotiated include:

  1. the execution of the shareholder’s security interest should not trigger insolvency proceedings against the shareholder. This is often very important when the shareholder is the holding company of several SPVs and intends to obtain separate limited recourse financing for other SPVs and other real estate projects;
  2. restrictions on non-competition or the possibility of claiming debt by the shareholder; however, the shareholder may wish to retain the option of reclaiming his debt in the event of the borrower’s insolvency. The lender, as the senior secured party, is often expected to want to dictate when and how execution can take place on the assets. For subordinated debt, the lender would require the debt to be fully subordinated at all times while the loan is outstanding and payments are only allowed in specific circumstances (usually if there is a cash surplus after the loan is over. loan service). Therefore, the lender would generally include a series of restrictions on the shareholder, such as restricting their ability to make claims on the debt or call the debt, if such action competes with the interest of the lender. Having said that, if an insolvency proceeding has been opened against the Borrower, the shareholder would like to claim his debt to ensure that his liabilities are part of the borrower’s overall liabilities in the insolvency proceedings. .

Final thoughts

In recent months in REF News and Opinions, we discussed some of the key features of limited recourse finance, which remains a common and preferred approach to real estate finance in Europe. We also explored some of the common issues that can arise in these structures as well as issues to consider when taking security. We encourage our readers to keep this four part series handy as a reference guide.

[1] Paragraph 1, annex 7, 2003 finance law

[2] Paragraph 3, annex 7 of the 2003 finance law


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