Question 1

What is a special purpose entity (SPE)?

Accepted Answer

An SPE is a legal entity created for a specific, limited purpose. In real estate: SPEs are commonly used to: hold individual properties (each property is owned by a separate SPE), isolate risk (the SPE’s liabilities do not affect the parent company), facilitate financing (lenders prefer lending to SPEs because: the property is the sole asset, the SPE’s operations are limited, and the risk of contamination from the parent’s other activities is minimized), and simplify transfers (selling the property by transferring the SPE’s ownership interests). Common SPE forms: LLC (most common in Florida) and limited partnership.

Question 2

What are the requirements for a "bankruptcy remote" SPE?

Accepted Answer

Bankruptcy remote: lenders often require SPEs to be structured as "bankruptcy remote" entities to minimize the risk that the SPE will file for bankruptcy or be consolidated with the parent. Requirements: separate existence (the SPE must: maintain separate books and records, have its own bank accounts, and conduct business in its own name), independent director (the SPE’s organizational documents require an independent director whose consent is needed for a bankruptcy filing), non-consolidation opinion (a legal opinion that the SPE will not be substantively consolidated with the parent in bankruptcy), and limited purpose (the SPE’s activities are restricted to owning and operating the specific property).

Question 3

How are SPEs used in Florida real estate transactions?

Accepted Answer

FL RE use: commercial properties (each major property is held in a separate SPE: office buildings, shopping centers, hotels, and apartment complexes), construction projects (the project is developed through an SPE to isolate construction risk from the developer’s other assets), joint ventures (the JV partners create an SPE to hold the jointly developed property), and 1031 exchanges (SPEs can facilitate tax-deferred exchanges by holding replacement properties). The SPE is formed as: a Florida LLC (Chapter 605) or limited partnership (Chapter 620).

Special Purpose Entity (SPE)

Special Purpose Entities (SPEs)

Purpose

Bankruptcy Remote

FL RE Use

Related Terms

Barnes Walker Business Law

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