llcr project finance

llcr project finance

The Role of Limited Liability Company (LLC) Structures in Project Finance

1. Introduction to Project Finance and LLC Structures

The principal benefits of the LLC structure are its limited liability protection with a flow-through taxation feature. This corporate form does not have the requirement for the various levels of management (officers, board of directors) that are inherent in a corporation. Moreover, the personal liability saddled upon a created principal-agent relationship (fiduciary duty) when the LLC is operating as a partnership can be negated especially if members are passive investors. This paper will examine whether the members of an LLC can replicate the strict liability protection under the Ultra Lube case. This paper will look at the project company’s need for Limited Exception to Uniform Control Participation Parties Agreement Rule and will attempt to provide an updated analysis, to the level of technology developed in the Corporate Law Laboratories which represents the substantive, interpretive standard. This paper will explore the traditional partnership doctrine standards to cater to the LLC preferences.

The use of a limited liability company structure in complex project finance deals has grown in popularity as a result of the flexibility and limited liability afforded by this vehicle. This entity can easily and effectively operate as a corporation or a partnership when utilized properly. Many non-traditional organizations are utilizing the vehicle in special business activities that at one time could only be the result of an asset-based joint venture. The purpose of this paper is to identify the uses of the limited liability company with the project finance structure and to examine the requirements and potential problems that may exist when using this entity.

2. Advantages of Using LLCs in Project Finance

This change to the “consenting” theory of the business association is precisely what makes the LLC such an attractive vehicle for use in project finance. It authorizes very detailed and specific provisions in the operating agreement which the members can tailor to meet their individual needs and risk allocations. It also guarantees the enforceability of these provisions by simply removing any fiduciary duties which naturally may conflict with these specific agreements. The LLC gives project financing parties the flexibility they need without requiring everyone to assume complete fiduciary duties.

In light of the above analysis of the increasing use of the LLC structure for project finance vehicles, this part will develop a standard model for such a vehicle using the limited liability company. After discussing the advantages of using LLCs in project finance, this part will describe a basic structure that Europeans could use for an LLC in project finance and present this structure using only European contracts and widely accepted legal principles. Finally, to illustrate the proposals, this part will model a specialized Build Own Operate Transfer (“BOOT”) vehicle and conclude with observations that are related to the discussion of the model.

3. Challenges and Risks Associated with LLCs in Project Finance

There is no denying that you will find in many an LLC agreement the level of governance and operational detail required for a project finance enterprise. However, as discussed below, it may take less than one would expect to tip the balance and render an LLC a less appropriate vehicle for project finance. Of course, there are limits to what an LLC agreement can accomplish: despite its status as a contract, an LLC agreement is not a panacea. And it is beyond the scope of this article to argue that corporate or limited partnership law will yield a clearly superior result as a threshold matter. Indeed, there will be arguments to the contrary. Still, while an LLC may be able to address the unique challenges faced in structuring a large number of participants in a single enterprise (e.g., the maze of partners needed for a large scale partnership flip transaction; the labyrinth of benefits needed to monetize various tax credits), outside a few outlier examples the sponsors are generally looking to raise and allocate capital in a cost effective manner. There will be questions about the limits of that capital: the contribution over the Fannie/Freddie loans, vs. the sponsors’ desired return, for example. At the end of the day, however structured, it is the project (and not the vehicle that owns it) that needs to be the common investment of all the different participants.

4. Case Studies and Best Practices in Utilizing LLCs for Project Finance

Where experienced infrastructure owners take advantage of the multiple benefits offered by using an LLC and use LLCs for governance structures on successful infrastructure projects, they sidestep some of the obstacles presented by securitizations involving asset governance issues. Through the three legal entity options available for asset securitizations, project sponsors can avoid this dispute over which level if any, is best for project services. Use of any of these project entity options effectively trims the decision tree and may reduce structuring costs. Hopefully, existing unexplored LLC governance options soon will begin to offer some of the benefits as do these three US infrastructure assets currently using or that have used LLCs.

Other sections of the dissertation explore the many issues that can arise from utilizing LLC structures during the development and financing of an infrastructure project. For a few diverse examples of how LLC structures are used in project finance, this section describes four case studies involving infrastructure financings that feature the utilization of an LLC feature in each project. In other cases, owners of infrastructure similar to the projects proposed in these case studies avoided LLC structures due to the uncertainty these structures impose on lenders. The member and operational risk existing at the enterprise level provides one notable reason for this dispute in appropriate asset governance. These three case studies and best practices exposed by the three project financings presented offer some guidance about through what channels project owners can bypass some of the infamous difficulties for LLC projects.

5. Future Trends and Innovations in LLC Structures for Project Finance

However, as the project finance industry evolves to deal with new challenges such as mitigating climate change, corporate governance reforms, and the evolving globalization of societies and markets, as well as the attainment and operation of economic and political liberties by participants in these societies, it may be that the LLC, as written, has less to offer and the legal elements of project finance will be dominated by new hybrid organizations and structures.

Since then, the LLC form has proved to be extremely adaptive and has played a major part in the evolution of the international project finance industry. A truism of the project finance process is that the deal structure will always develop to reflect sponsor considerations and other outside factors such as meeting the taxation and planning considerations of the tax equity investors in the deal and the plethora of state and federal tax laws and regulations that govern their investment and operation. But the LLC has authorized ingenious financiers to develop highly unique and exceedingly complicated deal structures that have met remarkably diverse and complex developer, sponsor, financier, and project considerations.

The origins of the LLC go back hundreds of years and the roots of the present US system go back to the mid-1970s and the ‘tax holiday’ that was instituted in a number of states to lure chartered organizations from competitors (primarily significant banks) who up to then had been the building blocks of the project finance industry. Instead of fighting over state tax breaks to make the state statutes of one suit in particular, dominant which the advantage of size gave it current bases of operation (Delaware and New York).

The LLC form has proved to be extremely adaptable and has played a major part in the evolution of the international project finance industry by facilitating the fluid allocation of risk and mitigating potentially crippling legal obstacles in particular and unique project finance structures. As the project finance industry evolves to deal with new challenges such as mitigating climate change, corporate governance reforms, and the evolving globalization of societies and markets, the ‘standard’ LLC may find it has less to offer and the legal elements of project finance will be dominated by new hybrid organizations and structures.