“Away from Bankruptcy” Special Purpose Entities in Commercial Mortgage Lending: Features, Application and Limitations | Dechert srl
Part I – Introduction –
It has become common practice in commercial mortgages for the borrower to be structured as a “single purpose” or “special purpose” entity. In its simplest form, a special purpose entity is simply an entity formed solely to own a specific asset and any personal asset ancillary to it. Regardless of the requirements of lenders, many real estate owners routinely use special purpose entities to own properties as a method of confining particular assets and their associated liabilities to independent silos. At the other end of the spectrum is a full-fledged special purpose entity “remote from bankruptcy”. The organizational documents of such an entity will contain a long list of separation clauses, requirements for independent directors / managers and various other provisions relating to bankruptcy removal. At this end of the spectrum, it is also common in many larger commercial loan transactions for lenders to require a notice of non-consolidation and a guarantee of recourse from the promoter for a voluntary or involuntary borrower filing for bankruptcy. .
Although common in many types of lending transactions, full-fledged remote bankruptcy structures are commonly used in loans that will be included in Commercial Mortgage Backed Securitizations (âCMBSâ). This requirement has been part of CMBS since its inception, is expected by bond buyers, and has an impact on CMBS ratings by rating agencies (i.e. not using special purpose entities will negative impact on bond ratings). While not as ubiquitous as in CMBS loans, and often with fewer bells and whistles, bankruptcy remote SPEs are often required in non-CMBS mortgages and many lenders have the same requirements. for their balance sheet and CMBS loans.
This article will address some of the background and rationale for using SPE structures in commercial real estate loan transactions and is intended as a training piece on the subject.
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