Related-Party Transactions in Commercial Underwriting: A Borrower’s Guide

01

Start with a complete ownership and relationship map

List the borrower, parent companies, subsidiaries, sister companies, property-holding entities, management companies, trusts, and owners or family members that transact with the business. Show legal names, tax identification context where appropriate, ownership percentages, managers, guarantors, and the purpose of each entity. Include dormant entities and recently transferred operations when they still hold assets, obligations, contracts, or cash-flow rights relevant to underwriting.

02

Inventory every related-party transaction

Prepare a schedule of intercompany sales, purchases, rent, management fees, payroll allocations, shared services, loans, advances, distributions, capital contributions, asset transfers, guarantees, and expense reimbursements. For each item, identify the parties, amount, timing, accounting treatment, business purpose, contractual basis, payment history, and whether the transaction will continue after closing. Consistent labels across tax returns, financial statements, general ledgers, and projections make review easier.

• Requested amount and use of proceeds
• Historical and current financial statements
• Complete debt and ownership schedules
• Collateral and transaction documentation

03

Reconcile intercompany balances on both sides

An intercompany receivable in one entity should agree with the corresponding payable or equity treatment in the other, subject to documented timing differences. Match balances as of the same date and explain old, nonmoving, negative, netted, or forgiven amounts. Show cash transfers through bank records and identify entries that were posted after period end. Unreconciled balances can overstate assets, understate liabilities, or create uncertainty about where cash is actually available.

04

Document terms and test whether they are supportable

Provide executed leases, notes, service agreements, cost-sharing arrangements, board or member approvals, repayment schedules, and amendments. Explain how pricing was established and whether payment terms resemble those available between independent parties. A lender may normalize rent, compensation, fees, interest, or purchases if reported terms appear temporary, discretionary, below market, above market, or unsupported. A related-party agreement can be legally valid while still receiving different underwriting treatment.

05

Separate operating performance from internal transfers

Intercompany revenue, fees, or gains can inflate stand-alone results if the corresponding expense or economic burden sits elsewhere. Build a bridge from each entity’s reported income to consolidated or combined cash flow, eliminating duplicate revenue, expenses, receivables, payables, and profit where appropriate. Keep true third-party sales and costs visible. The objective is not automatically to combine every entity, but to show which earnings arise from outside customers and which depend on the affiliated group.

06

Explain owner loans, advances, and distributions

Reconcile due-to-owner and due-from-owner accounts, shareholder loans, draws, dividends, tax distributions, and capital contributions to the balance sheet and cash activity. State whether amounts are repayable, subordinated, interest-bearing, demand obligations, or intended as permanent equity, and support the conclusion with documents. Repeated owner advances may demonstrate support, but they may also reveal recurring operating shortfalls; large distributions can reduce liquidity even when accounting earnings remain positive.

07

Review guarantees, liens, and cash movement restrictions

Identify cross-guarantees, pledged affiliate assets, UCC liens, mortgages, cash sweeps, deposit-account controls, negative pledges, dividend limits, and covenants in existing agreements. An affiliate’s cash or collateral may not be freely available to the borrower, and support may require consent, subordination, or a formal guarantee. Conversely, the borrower may be supporting obligations outside the requested transaction. The lender will need the full contingent-liability picture before evaluating leverage and repayment capacity.

08

Connect related-party real estate to occupancy risk

When the operating company rents from an owner-controlled real-estate entity, provide the lease, payment history, property debt, taxes, insurance, maintenance responsibilities, and any planned changes in rent. Explain whether the lease survives a sale, refinancing, ownership change, or default. Underwriting may consider both market rent and actual cash obligations, particularly when property debt and operating-company debt rely on the same business cash flow.

09

Build projections from the post-closing structure

Forecast each material entity and a consolidated or global cash-flow view, clearly eliminating intercompany activity. Reflect the proposed loan, affiliate debt, owner compensation, rent, management fees, taxes, distributions, capital spending, and working-capital needs. If the transaction changes ownership, contracts, leases, or shared services, show the transition costs and effective dates. Stress-test the loss of affiliate support, normalization to market terms, and slower transfer of cash between entities.

010

Maintain a controlled update through closing

Create one related-party schedule with a reporting date, source documents, open issues, responsible owners, and required lender approvals. Update interim statements, balances, new transfers, distributions, guarantees, liens, and agreements before closing. Preserve final signed documents and implement recurring reconciliations after funding. PFCS can help organize the financing package and coordinate information with third-party capital sources, but the lender and qualified advisers determine acceptable adjustments, collateral, guarantees, approval, and final terms.