March 31, 2022
By: Robert E. Harig

A single purpose entity, or SPE, is a limited liability company, S-corporation or other entity formed for the single purpose of owning a specific parcel of commercial real estate. The SPE owns no other assets and is subject to no other liabilities. The real estate it owns serves as collateral for the lender. Often, the SPE contracts with an affiliated company to be the manager of the property and to handle matters such as tenant leases and day-to-day business operations of the property.

The purpose of the SPE is expressly limited under its governing documents to owning only the one specific parcel of commercial real estate. By so limiting the purpose of the SPE, the number of secured creditors that might be involved in any bankruptcy proceeding affecting the SPE is limited to the lender that is financing the purchase of the property.

A single purpose entity is often required under its governing and loan documents to keep its assets separate from those of its parent and other entities, to maintain separate books and records, and to not commingle its accounts with other entities.

The SPE’s loan documents usually limit its third-party indebtedness to just the underlying purchase loan, plus unsecured trade payables and possibly equipment leases. Single purpose entities are also generally prohibited from guaranteeing obligations of other entities or pledging their assets as collateral for the debts of another entity.

Single purpose entities are sometimes required by their lenders to have a springing member in order to protect against dissolution. That means that when the last remaining member of the SPE ceases to be a member, the springing member “springs” into place as a new member. That lets the SPE continue to exist without facing the prospect of dissolution due to having no members.

To further distance the single purpose entity from any possible bankruptcy, lenders might require a single purpose entity to have one or more independent managers or directors, and the approval of such independent manager or director is necessary for the SPE to file a bankruptcy petition. Some national service companies are available to provide independent manager services for an annual fee.

Lenders may look for additional bankruptcy protection by requiring the SPE to deliver a satisfactory non-consolidation opinion of counsel at the time of the loan closing. The non-consolidation opinion is given by an independent outside law firm selected by the SPE and approved by the lender. The law firm analyzes the structure of the subject single purpose entity. An opinion is addressed to the lender and is intended to conclude that, in the event that one or more equity owners of the SPE were to file a bankruptcy petition, the bankruptcy court would not consolidate the property that is owned by the SPE with the properties of its parent or other affiliated entities.

While lenders often require the borrower to be a single purpose entity, the SPE structure provides its own advantages to real estate owners and investors. By separating ownership of the real estate from the ownership of other assets, that real estate is shielded from the downturn or bankruptcy of those other investments. Also, by owning just a single parcel of real estate, the SPE structure simplifies current and future purchases, financings, and sales of the property.