Entity Specific Debt Clause Samples
The Entity Specific Debt clause defines and limits the types of debt obligations that are attributed solely to a particular entity within a larger corporate structure. In practice, this clause clarifies which loans, bonds, or other financial liabilities are considered the responsibility of the named entity, rather than being shared across affiliates or parent companies. By doing so, it ensures that creditors and counterparties understand the scope of financial risk and liability, preventing confusion or disputes over which entity is accountable for specific debts.
Entity Specific Debt. In this example, all of the facts described in the Base Case above are the same, except that we assume that (i) Company B is 100% owned by an upper-tier entity, “Holdings,” that will be acquired by the Operating Partnership in the Formation Transactions, (ii) Holdings is subject to $50 of Entity Specific Debt that will be assumed by the Operating Partnership at the Closing (for simplicity’s sake, we assume no assumption fee) and (iii) the $50 of Entity Specific Debt is allocated to RIF II Industrial Center. This results in the following variation of the variable “AA” in the formula as applied to RIF II Industrial Center: RIF I Industrial Center 0 = ▇▇ - ▇▇ ▇▇▇ ▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ -▇▇ = 25 - 75 RIF V Industrial Center 0 = 25 - 25 Total Portfolio Adjustment (“TPA”) -50 As noted above, M&S’s Fairness Opinion takes into account only asset-level debt in determining the relative unadjusted equity percentages of the Target Assets. Entity Specific Debt is allocated to relevant properties in the relevant Funds directly through the Equity Value formula. As demonstrated below, the effect is to increase the relative value of properties that are not burdened by Entity Specific Debt, and correlatively decrease the value of properties that are subject to Entity Specific Debt. The Equity Value formula accomplishes this by reflecting that TFTV decreases as a result of Entity Specific Debt. In the specific example above, because the aggregate outstanding debt that will be assumed by the Operating Partnership at the Closing now includes Holdings’ $50 of Entity Specific Debt, Total Formation Transaction Value would decrease by the same amount, from $500 to $450, relative to the Base Case. The Equity Value formula allocates the $50 decrease in TFTV solely to RIF II Industrial Center, and does not impact the Equity Value of the other Target Assets, as set forth below: RIF I Industrial Center 100 = 20% x [450 - (-50)] + 0 RIF II Industrial Center 50 = 20% x [450 - (-50)] + (-50) RIF III Industrial Center 100 = 20% x [450 - (-50)] + 0 RIF IV Industrial Center 100 = 20% x [450 - (-50)] + 0 RIF V Industrial Center 100 = 20% x [450 - (-50)] + 0 Total Equity Value 450
Entity Specific Debt. In this example, all of the facts described in the Base Case above are the same, except that Company C is subject to $25 of Entity Specific Debt related to Shopping Center 2, which will be assumed by the Operating Partnership upon the completion of the Formation Transactions. This results in the following variation of the variable “AA” in the formula as applied to Shopping Center 2: Shopping Center 1 0 = 25 – 25 Shopping Center 2 -25 = 25 – 50 Shopping Center 3 0 = 25 – 25 Shopping Center 4 0 = 25 – 25 Total Portfolio Adjustment (“TPA”) -25 In addition, by virtue of the assumption by the Operating Partnership of this Entity Specific Debt in connection with the Formation Transactions, the Total Formation Transaction Value will have decreased by the $25 value of the Entity Specific Debt from $400 to $375. Applying the Equity Value formula reflecting these new facts and assuming that there is no increase or decrease in mortgage debt outstanding, the Equity Value of each of the four properties is as set forth below: Shopping Center 1 100 = 25% x [375 - (-25)] + 0 Shopping Center 2 75 = 25% x [375 - (-25)] + (-25) Shopping Center 3 100 = 25% x [375 - (-25)] + 0 Shopping Center 4 100 = 25% x [375 - (-25)] + 0 Total Equity Value 375 Here, through the operation of the Equity Value formula, all $25 of Company C’s Entity Specific Debt has been allocated to Shopping Center 2 and has not impacted the Equity Value of the other Target Assets. However, without further adjustment, Company C and Company D, each as a 50% owner of Shopping Center 2, are equally burdened by Company C’s Entity Specific Debt as show below: Allocated Share (unadjusted) of Equity Value before Inclusion of Entity Specific Debt: 50 = 100 x 50% 50 = 100 x 50% Allocated Share (unadjusted) of Equity Value after Inclusion of Entity Specific Debt: 37.5 = 75 x 50% 37.5 = 75 x 50% Decrease in Allocated Share (unadjusted) of Equity Value due to Inclusion of Entity Specific Debt: 12.5 = 50 - 37.5 12.5 = 50 - 37.5 Accordingly, by virtue of the operation of the Equity Value formula, Company C has only been allocated half ($12.5 of $25.0) of the Company C Entity Specific Debt obligation that should be allocated to Company C, and Company D has been allocated the remaining $12.5. In order to address this inequitable allocation of Company C Entity Specific Debt , the definition of “Allocated Share” provides for an adjustment to (i) reduce the amount that would otherwise be payable to Company C by the amount by wh...