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									                                                                        Originally published in the October 2003 issue of MULTIFAMILY EXECUTIVE
 legal column                                                                       magazine. Posted with permission from Hanley-Wood, LLC.

              Untangling the Ownership Web
                           Restructure Your Portfolio Through a Roll-up
                                                                                                           [By Pamela V. Rothenberg]

             veryone is always looking for          But this structure is not without its       through the growth of her portfolio, the
             a sure thing, whether in our        challenges. If title to each portfolio asset   problem compounds.
             individual or business lives.       is held by a separate SPE, the result is           Given the portfolio’s size and complex-
             As a result, many companies         often a tangled and complicated web of         ity, the asset manager should consider
             shelter their assets rather than    ownership entities, leading to organiza-       restructuring it through a roll-up transac-
take a risk. So, it should come as no sur-       tional headaches, significant reporting        tion. While a roll-up transaction can take a
prise that most real estate developers and       requirements, and considerable adminis-        number of forms, it generally involves the
asset managers use separate single pur-          trative costs—especially for owners or         consolidation of the ownership interests
pose entities (SPEs) for the ownership of        asset managers with a high vol-
real estate assets as the preferred operat-      ume of transactions.
ing structure.                                                                                                    Pamela V. Rothenberg is a
    Driving the use of SPEs is the univer-       Practical Solutions                                              member of the real estate
sal objective of owners and managers to             Consider the case of an                                      development and real estate
                                                                                                                     technology groups at
achieve the greatest possible limitations        aggressive asset manager who,                                   Womble Carlyle Sandridge &
on their potential third-party liabilities,      thanks to low interest rates and                                 Rice PLLC in Washington.
as well as the customary bankruptcy-             favorable market conditions in                                     She can be reached at
remoteness requirements of asset-based           her region, is able to acquire and                      
equity and debt transactions in today’s          manage a portfolio of approxi-
capital markets. It also makes imminent          mately 50 multifamily rental
sense for owners who raise equity from           assets with an estimated value of $750 mil-    of all the entities currently holding title to
different investors for each development         lion within a three-year period.               a portfolio into a single entity.
or acquisition.                                     As is customary—and required by the            In this sample case, a consolidation
    By segregating assets into separate          institutions providing her equity and          would best be achieved through a roll-up
entities, owners can protect the remainder       debt—for each company, the asset manager       of the membership interests held by
of their portfolio from the reach of third-      establishes a separate, single-purpose lim-    investors in the various LLCs that own
                                                                                                her portfolio properties (Ownership
  A ROLL-UP TRANSACTION ENABLES THE                                                             LLCs) into an umbrella limited liability
                                                                                                company (Roll-Up LLC). When the roll-
  ASSET MANAGER TO STREAMLINE HER                                                               up is complete, every investor in the
                                                                                                Ownership LLCs will own interests in
   PORTFOLIO’S OWNERSHIP STRUCTURE                                                              the Roll-Up LLC.

   AND REDUCE ADMINISTRATIVE COSTS.                                                             Benefits that Payoff
                                                                                                    A roll-up transaction would enable the
party creditors, which can generally only        ited liability company, which is considered    asset manager to streamline her portfo-
reach the equity in the particular entity        the owner. In this case, twenty or more        lio’s ownership structure, significantly
with which they are transacting, and             investors own the membership interests of      reduce administrative costs, and achieve
assure investors that their investments          each limited liability company (LLC).          her other short and long-term objectives.
will not be at risk for liabilities associated       Clearly, the asset manager has amassed     (See “Roll-Up Benefits,” page 70.)
with unrelated assets.                           a significant and impressive portfolio             Before a roll-up can be implemented,
    Furthermore, lenders and equity              within a relatively short period of time. By   several steps need to take place. Initially,
investors significantly reduce the likeli-       virtue of the 50 SPEs that own her portfo-     each portfolio property would be
hood that the asset serving as collateral        lio’s assets, the asset manager has created    appraised and a dollar value assigned to
for their investments will be dragged by         an intricate and fragmented ownership          the membership interest owned by
developers into a bankruptcy proceeding          structure that, from a management per-         each member of each Ownership LLC.
filed by or against the principal owners of      spective, is exceedingly cumbersome and        Based upon these appraised values and
the asset-owning entity or their affiliates.     costly. As the number of SPEs increases        Ownership LLCs dollar amounts, an

68   Multifamily Executive • October 2003                                                                 w w w. m u l t i f a m i l ye x e c u t i ve. c o m
                                                                      Originally published in the October 2003 issue of MULTIFAMILY EXECUTIVE
 legal column                                                                     magazine. Posted with permission from Hanley-Wood, LLC.

exchange ratio would be established for membership interests in each Ownership will likely be exempt from the securities
the exchange of interests in the Roll-Up LLC that he contributed to the Roll-Up law registration requirements.
LLC upon contribution of the membership LLC. Since after the roll-up each                        However, to properly claim this securi-
interests in the Ownership LLCs. Using the Ownership LLC will be a single-member ties law exemption for the roll-up, certain
exchange ratio, the asset manager would limited liability company owned by the notices must be filed with the Securities
then establish the percentage inter-                                                                and Exchange Commission (SEC)
est in the Roll-Up LLC to be received                                                               and the comparable state securities
by each existing investor.                            R       -U B
                                                          OLL P ENEFITS                             commissions, depending upon the
    A new LLC would be organized                                                                    state securities laws of the resi-
                                             Roll-up transactions can help asset managers:
to serve as the Roll-Up LLC, and                                                                    dences of the existing investors.
the members in the Ownership                                                                            Even if exempt from SEC and
                                            I Streamline the portfolio’s ownership structure.
LLCs (contributing owners) would                                                                    state law registration require-
                                            I Reduce administrative costs significantly.
contribute their membership inter-                                                                  ments, the roll-up transaction will
ests to the Roll-Up LLC in exchange         I Best position the portfolio for growth over the       nonetheless require the prepara-
for membership interests in it. The           next cycle through the use of an improved             tion of a private placement memo-
Ownership LLCs that currently                 asset ownership structure.                            randum (PPM) for both current
own the portfolio properties would          I Facilitate future investment by institutional         investors and any new investors in
remain in place. In effect, the               equity partners and/or by individual accredited       the Roll-Up LLC.
Ownership LLCs would become                                                                             The PPM to current investors
wholly-owned subsidiary entities            I Offer diversification of the existing investors’      should explain, in detail, the con-
of the Roll-Up LLC.                           investments over the asset manager’s entire           solidation/conversion process as
    Subsequent to transaction, the                                                                  well as the advantages, disadvan-
Roll-Up LLC could raise additional          I Maintain control over the portfolio in a manner       tages, and risks involved.
capital by issuing additional mem-            that is consistent with past management                   The PPM to any new investors
bership interests.                                                                                  should explain, in detail, the
    The consent of the contributing         I Employ a management structure that enables            financial, risk, and tax aspects of
                                              current investors to serve in an advisory direc-
owners, as well as existing lenders                                                                 an investment in the Roll-Up
                                              tor position with limited managerial discretion.
for the portfolio, will likely be                                                                   LLC. Both PPMs should include
                                            I Provide a mechanism for an investor’s sale of
required for the roll-up transac-                                                                   a description of the portfolio
                                              his membership interest (i.e., increased
tion. To save transaction costs,                                                                    communities owned by the Roll-
                                              investor liquidity).
these approvals should be ob-                                                                       Up LLC.
                                            I Establish an ownership structure that will facil-
tained (even if only in concept)                                                                        If all investors are accredited
                                              itate the sale of the portfolio in the future.
before proceeding with any of the                                                                   investors, the PPM need not be in a
required documentation. The con-            I Set up an improved organizational/manage-             particular form nor meet specific
                                              ment structure that is as simple and flexible as
sent of other third parties also may                                                                regulatory requirements.
be required. Because the roll-up                                                                        The applicability of the SEC’s
                                            I Maintain in place the present financing of the
could be viewed as a change of                                                                      broker-dealer registration require-
                                              portfolio properties.
control or indirect ownership,                                                                      ments also should be addressed
other contracts affecting the portfo-       I Continue using a SPE bankruptcy-remote                before the roll-up transaction is
lio communities, which may con-               ownership structure that is required for new          implemented. The sellers of the
                                              financing transactions.
tain restrictions on transfer and/or                                                                securities to new investors will either
the Ownership LLCs, should be               I Offer an attractive investment entity for new         need to be registered as broker-deal-
examined, and any required con-                                                                     ers or exempt from registration.
sents obtained.                                                                                         A roll-up transaction that consol-
                                                                                                    idates ownership of a portfolio’s
Know the Law                                    Roll-Up LLC, individual Ownership LLCs communities into a single umbrella oper-
    The tax consequences of the roll-up will be treated as a disregarded entity (i.e., ating company can provide a number of
structure also must be evaluated. The con- not separately taxed as an entity) for fed- benefits to an owner or asset manager.
tribution by existing investors to the Roll- eral and state income tax purposes. As a            In addition to simplifying a compli-
Up LLC of their respective membership consequence, only the Roll-Up LLC will cated ownership and management struc-
interests in each Ownership LLC should have to file tax returns going forward.                ture and reducing administrative costs, a
generally be a tax-free transaction to both        Securities law requirements also must roll-up can serve as the vehicle through
the investors and the Roll-Up LLC.              be considered. If all of the existing which a portfolio may be best positioned
    Each investor will obtain a tax basis in investors in the Ownership LLCs are for future growth, additional capital
his membership interest in the Roll-Up accredited investors under applicable fed- investments, and, ultimately, a portfolio-
LLC equal to the adjusted tax basis of the eral and state securities laws, the roll-up based sale. M

70   Multifamily Executive • October 2003                                                               w w w. m u l t i f a m i l ye x e c u t i ve. c o m

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