Lenders often require their borrowers to be “special purpose entities” in real estate transactions. This is a way that lenders can mitigate their bankruptcy risk in the event that the borrower or any of its parent entities file for bankruptcy. In addition, since most real estate financing is non-recourse, lenders require that the borrower is a separate, special purpose entity so that no other property or business will impact the property which is the subject of the underlying loan. But what it means to structure a borrower as a “special purpose entity” can mean different things, depending on the underlying loan circumstances. This article examines the different elements typically required when structuring a borrower as a “special purpose entity.”
