April | May 2016
everyone else’s profits, so Breslow does not
expect to see a tail of more than 5-10%.
Whither usury laws: which state’s
Valuation is rarely an explicit requirement
rules apply?transfers of ownership around
for typical
Usury rules are anothertransactions are not
succession. “These type of regulation that
are structured in the They are set by the various
in a state of flux. same way as selling
US states, according to factors includingseed or
minority or controlling interests to the
sizestrategic and the type of borrower, with
of loans investors,” Breslow reveals. Rather,
interest rate thresholds letsfor civil usury,
“a sunset provision set the key person
andcontinue to share in profits on usury.
higher thresholds for criminal a declining
Most direct lending deals are below‘sunsetted’
basis, and in this way they get usury
ceilings of the business,” explains Breslow.
This
out or outside the scope of usury laws,
but may imply some do extra due diligence what
investors should probabilistic value on
on those that might be caught in the net. but
is a kind of declining variable annuity,
there is no need to carry out a valuation
“When loans are made, usury laws always have
exercise.
to be considered,” says Ziser. But risk can be
transferred multiple times: first to platforms,
One reason for this deal structure is
then to investors, and subsequently continuing
optimising tax efficiency for the amongst
investors.
UsuryExplains either the borrower’s
employees. laws in Nissenbaum, “Though
2
2
a one-off sale of retirees’ ownership could
be advantageous for their estate, because
or the lender’s state will often need toat lower
profits would incur capital gains tax be
observed. The general thinkingnew been that
rates than income tax, if the has owners
“if the loanoutright purchase of interests in
made an complied at origination, then the
transfer of suchthe consideration would not
the business, loans to a non-bank lender
was thought to not as it would beThe Madden
be tax deductible change that.” viewed as
decision reached the in public equity.” SRZ also
like an investment opposite conclusion.
Midland Funding has petitioned the US tax
has specialist teams of industry-leading
Supreme Courtwillhear its on these matters the
lawyers who to advise complaints about
implications the fund formation team.
parallel to of the Madden decision.
“Future
legal rulings will determine if state usury laws
become a bigger managers?
Centenarian issue in the space,” says Ziser.
A Though both emergency ruleslonger-term
number of other federal and can also be
relevant. plans should be in place, in
succession
some cases they may not be actioned for
Inmany years or even decades. The absence
the meantime, the most conservative
approach to theseretirement age in the
of a mandatory legal uncertainties could
be to follow a ‘lowest common denominator’
United States – combined with the energy,
approach and ensure that interest rates are
stamina and good health of some people
working in finance – means that a number
of septuagenarian and even octogenarian
inside fund managers are usury ceiling, or that
hedge the lowest US state still going strong.
loan types are nonagenarian and centenarian
The number of outside the scope of usury laws.
A more time-consuming sure to grow.
money managers seems approach could be to
check if interest rates on each loan are inside
Studies including some from the Brookings
the specific ceilings prevailing in that borrower’s
Institute show higher income groups in the
state, extending their lifespans every year.
US arein order to get comfort in the event of
Madden prevailing.
At the other end of the age spectrum, many
successful hedge fund managers could afford
Irrespective of usury laws, alternative lending
to retire almost any time and some choose to
offers potential for investors to target doubledo so in their 40s, making it a more urgent
digit yields
matter. THFJwhile supplying finance that some
companies, and individuals, apparently cannot
obtain anywhere else.
THFJ
.