As banks focus on making large loans to corporations, some fund managers are stepping into the void and offering loans to small- and mid-sized businesses. Unlike investments in traded securities, loan origination in the U.S. raises tax issues for certain U.S. tax-exempt and foreign investors. See parts one and three of our series on hedge funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016). A recent seminar featuring Kramer Levin partners Barry Herzog, Kevin P. Scanlan and George M. Silfen provided a roadmap for managers seeking to form direct lending funds that minimize the adverse tax consequences to investors not otherwise subject to U.S. tax. This first article in our two-part series discusses common investment terms for direct lending funds; provides an overview of the tax implications from loan origination activity to foreign and U.S. tax-exempt investors; and discusses the tax mitigation benefits of “season and sell” and blocker structures. The second article will delve into treaty-based fund structures and privately offered closed-end direct lending funds as additional potential solutions to these direct lending tax concerns. For additional insights from Scanlan, see our three-part series on “Closing a Hedge Fund to Outside Investors”: Factors to Consider (Jan. 21, 2016); Operational Considerations (Jan. 28, 2016); and Mechanical Considerations (Feb. 4, 2016).