Articles

Finding Solutions to the Credit Crunch

Lindsay A. Martin

As the credit crunch puts the squeeze on lenders, lenders look for more capital – a search that sometimes puts borrowers’ businesses and estate plans at risk.

Businesses and entrepreneurs need cash to be successful, but in times of a credit crunch, it is hard to get. Current economic conditions force lenders to tighten credit requirements, and borrowers face stricter underwriting requirements. As a result, lenders increasingly look to secure loans with any property a borrower might have ownership in, whether that property is the subject of the loan or not. Limited partnerships, family ranches, and other assets, are being used as collateral for wholly unrelated loans. But having a partnership pledge property for an unrelated loan can potentially break the entity for both tax-planning and business purposes. With no way to provide collateral without compromising the integrity of their entities, some borrowers just don’t go forward with otherwise sound transactions. Attorneys at Oppenheimer, Blend, Harrison and Tate, Inc. have been working with lenders and borrowers to find solutions to the liquidity crisis.

“The effect of the current lending climate is to chill deals and reduce business transactions,” says Marty Roos, the Estate Planning Practice Group Leader at Oppenheimer Blend.

Roos says that in recent months clients have come to him to review transactions in which lending institutions have requested pledges of collateral for unrelated loans. For example, one client was asked to put up a multi-million dollar ranch for an existing revolving line of credit used to operate a business. But that ranch was in a family limited partnership, and the partnership was not a party to the loan agreement. The question, says Roos, is “How does a business entity effectively get used as collateral for a personal loan to start another venture?”

Under both Texas law and the Internal Revenue Code, loans to an entity should be used to further the interests of that entity. So, if a client owns an interest in an investment partnership, pledging the partnership for a personal loan risks invalidating the partnership for both federal tax purposes and state business law. “When both the lender and the borrower are unaware that such a transaction jeopardizes a tax-planning business structure, it’s a lose-lose situation”, says Laura Mason, a shareholder in the Corporate division of Oppenheimer Blend.

Awareness, she says, is the first part of developing a solution that both satisfies the underwriter and retains the legitimacy of the borrower’s business and estate planning. Mason went on to say “From there, it takes careful planning to structure the transaction to preserve the integrity of the borrower’s entity, and provide collateral to the lender.”

In recent months, Mason and Roos have worked with national lenders and mutual clients to develop a way out of this maze of competing needs and requirements. By having the borrower pay a fee to the entity for the right to encumber particular property as collateral, he or she can use the property of an entity for a personal loan. Moreover, Mason says that if done properly, the pledge of a specific asset in a partnership for a fee may only have a negligible effect on the fair market value of the entity.  The fee agreement strategy can work between entities, too, she says, allowing one business to use the property of another to get liquidity.

The end result is liquidity for the client, adequate security for the lender, and preservation of a business or estate plan.  “The last thing we want to see is for planning to come undone because a client or the lender was unaware that there was a problem,” says Roos. “People need cash for deals. You just need to know there’s a right way to get it, and a wrong way.”

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Lindsay A. Martin is an Associate in the Estate Planning & Probate practice of Oppenheimer, Blend, Harrison and Tate, Inc. He has been recognized as a Texas Rising Star and one of San Antonio's Best Lawyers. Lindsay can be reached at 210.224.2000 or lmartin@obht.com

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