Special Purpose Entity Requirements for CMBS Borrowers
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.
SPEs Prevent Lenders and Servicers from Offering Debt Workouts and Other Default Prevention Services
While SPEs are designed to protect both borrowers and lenders during the term of a conduit loan, they do prevent 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, partially since SPEs are single-purpose, and because conduit loans have various contractual restrictions, none of these options are typically available to CMBS borrowers.