A special purpose entity (SPE) is a legal entity that is specifically designed to hold one asset and to prevent that asset from being involved in external bankruptcy proceedings. If you or your company files for bankruptcy, your CMBS loan collateral will generally not be involved. SPEs are typically required due to the fact that they are bankruptcy remote; if the corporation or individual who is the actual borrower declares bankruptcy, the SPE is much less likely to be affected. SPEs are usually structured as a limited liability company (LLC), but can also be structured as a limited partnership (LP).

The main advantage of using a Special Purpose Entity (SPE) for a CMBS loan is that it is designed to protect both borrowers and lenders during the term of the loan. SPEs are single-purpose, bankruptcy-remote entities, meaning that if the individual borrower or the borrower’s parent company files for bankruptcy, the commercial property in question will not be involved. This helps to reduce risk for lenders, as they are not exposed to the potential bankruptcy of the borrower. Additionally, SPEs prevent lenders from providing certain services that could prevent a loan default, such as capitalizing past due interest, offering additional funds or debt workouts, taking equity, or allowing the borrower to add or substitute collateral in order to avoid default. Source

The main risk associated with using a Special Purpose Entity (SPE) for a CMBS loan is that it prevents lenders from providing certain services that could prevent a loan default. For example, portfolio lenders and servicers can often capitalize past due interest, offer additional funds or debt workouts, take equity, or allow the borrower to add or substitute collateral in order to avoid default. But, since SPEs are single-purpose, and because conduit loans have various contractual restrictions, none of these options are typically available to CMBS borrowers.

Mezzanine lenders also sometimes require that independent director or special board member be appointed to the board of the SPE in order to prevent an inappropriate bankruptcy filing. Due to this, mezzanine loans typically have much higher interest rates and fees than CMBS loans and other types of senior commercial real estate mortgages.

If you’re considering taking out a CMBS loan for a commercial property, your lender will typically require you to form a special purpose entity, or SPE, that will own the property and will act as the legal borrowing entity. Specifically, the borrower must form a single-purpose, bankruptcy-remote SPE, a special purpose entity that is specifically designed to hold one asset and to prevent that asset from being involved in external bankruptcy proceedings. So, if you or your company files for bankruptcy, your CMBS loan collateral will generally not be involved.

In general, lenders look at two major metrics when deciding whether to approve a CMBS loan; DSCR and LTV. However, they also look at debt yield, a metric which is determined by taking the net operating income of a property and dividing it by the total loan amount. This helps determine how long it would take a lender to recoup their losses if they had to foreclose on the property. And, while it’s true that CMBS loans are mostly income based, lenders still typically require a borrower to have a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount.

The tax implications of using a Special Purpose Entity (SPE) for a CMBS loan depend on the type of entity used. Generally, SPEs are structured as pass-through entities, meaning that the income and expenses of the entity are passed through to the owners of the entity. This means that the owners of the SPE are responsible for paying taxes on the income generated by the SPE. Additionally, the owners of the SPE may be able to take advantage of certain tax deductions related to the SPE, such as depreciation and interest expenses.

It is important to note that the tax implications of using an SPE for a CMBS loan may vary depending on the jurisdiction in which the SPE is formed. Therefore, it is important to consult with a tax professional to determine the specific tax implications of using an SPE for a CMBS loan.

Sources:

• Special Purpose Entities in Relation to CMBS Loans
• Mezzanine Financing in Relation to CMBS Loans