Presenting a live 90-minute webinar with interactive Q&A Special Purpose Entities in Real Estate Transactions: Structuring and Documentation Mastering Separateness Provisions, Single Member LLCs, Recycled Entities, Independent Directors and Non-Consolidation Opinions WEDNESDAY, JANUARY 4, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Samuel R. Arden, Partner, Hartman Simons & Wood , Atlanta Whalen Kuller, Senior Counsel, Hartman Simons & Wood , Atlanta John H. Lewis, Senior Counsel, Hartman Simons & Wood , Atlanta The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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SPECIAL PURPOSE ENTITIES IN REAL ESTATE TRANSACTIONS: STRUCTURING AND DOCUMENTATION January 4, 2017 Sam Arden Whalen Kuller John Lewis
Introduction: What is an SPE • “Single purpose,” “special purpose” and “bankruptcy remote” are interchangeable in the context of a structured or securitized commercial real estate loan transaction • Important differences between a single-purpose entity and a bankruptcy-remote entity 6
Introduction: What is an SPE • Single-purpose entity refers to a corporation, limited partnership or limited liability company formed under laws of a particular state • Organized for a narrow, specific or temporary purpose • Vast majority are used in connection with real estate financing transactions 7
Introduction: What is an SPE • Not all single-purpose entities are bankruptcy-remote entities • Bankruptcy-remote entity is always a single-purpose entity • Has additional characteristics that a single-purpose entity does not have 8
Introduction: What is an SPE • SPEs feature some measure of “bankruptcy remoteness” • Nationally recognized rating agencies require a single- purpose entity also be bankruptcy-remote • Will have features that reduce the availability of assets to satisfy creditors 9
Introduction: What is an SPE • Typical SPE is bankruptcy-remote in two primary ways o SPE is structured and formed to render it less likely that the SPE’s assets will be made available to creditors of the originating entity o SPE is structured to render it less likely that the SPE itself will become a debtor in a bankruptcy proceeding 10
Introduction: What is an SPE • A bankruptcy-remote entity is not a bankruptcy-proof entity • A bankruptcy-remote entity cannot be prohibited from seeking Bankruptcy Code protection 11
Introduction: What is an SPE • When structuring a bankruptcy-remote entity, the goal is to reduce the likelihood that the entity will o File a voluntary bankruptcy action o Become insolvent o Have an involuntary bankruptcy action filed against it • All major rating agencies require a single-purpose entity be bankruptcy-remote 12
Introduction: When is an SPE Required • Used in a variety of commercial loans issuances and mezzanine financings • If destined for pooling with other commercial real estate loans for a CMBS issuance, certain rating agency criteria may apply 13
Introduction: When is an SPE Required • Loans not subject to rating agency criteria, lenders still require the borrower to meet rating agency criteria • Smaller loans, some lenders may not require an SPE at all, or may require an SPE meets only some SPE requirements • Commercial real estate loans over a certain monetary threshold amount are subject to SPE lending strictures 14
SPE Formation and Structure: • The type of entities most frequently used in rated commercial mortgage transactions are: o Limited liability companies (“LLCs”) o Corporations and limited partnerships 15
SPE Formation and Structure: • Depending on the size of the loan transaction, one or more members of an SPE will need to be an SPE • Also must comply with most or all of the single-purpose and bankruptcy-remote requirements • An SPE that is organized as a Delaware, single-member LLC will not be required to have its sole member be an SPE 16
SPE Formation and Structure: • At least one member of the SPE holding a meaningful economic interest will be required be an SPE • Chief concern is that the bankruptcy or insolvency of non- SPE members may precipitate the bankruptcy or insolvency of the SPE • At least one member of the SPE that is itself an SPE reduces such risk 17
SPE Formation and Structure: Delaware • Delaware is the preferred state of choice for formation of the SPE • Rating agencies have a favorable view of Delaware law 18
SPE Formation and Structure: Delaware • Reputation as a preeminent jurisdiction for entity formation is well-deserved • Delaware LLCs are popular for structured finance and securitization transactions 19
SPE Formation and Structure: Delaware • Advanced state of its law • Statutory laws governing business entities are continually updated and market concerns are addressed • Also has a wealth of judicial decisions 20
SPE Formation and Structure: Delaware • Appealing because it does not aggressively tax non- Delaware source income • Delaware LLC statutes piggyback on federal tax rules • Most LLCs can issue interests without requiring a capital contribution 21
SPE Formation and Structure: Delaware • Business-friendly state government is attractive to businesses • Legislature and Governor have demonstrated a willingness to understand and be responsive to the needs of business 22
SPE Formation and Structure: Single-member LLCs • If the SPE is organized as a single-member Delaware LLC, its sole member will not be required to be an SPE • The SPE will be “disregarded” for federal and state income tax purposes • An LLC provides flexibility 23
Specific SPE Provisions • SPE’s organizational documents required to include certain provisions, such as: o Restrictions intended to limit or eliminate the ability of an SPE from incurring liabilities to be included as part of the loan transaction o Restrictions intended to insulate the SPE from liabilities o Restrictions intended to protect the SPE from dissolution risk o Restrictions intended to limit a solvent SPE from filing a bankruptcy petition 24
Specific SPE Provisions: Single-Purpose Provisions • SPE’s objects and powers are restricted as closely as possible • Purpose is to reduce the SPE’s risk of insolvency due to claims created by activities unrelated to the securitized assets 25
Specific SPE Provisions: Single-Purpose Provisions • SPE should not engage in unrelated business activities • By requiring a limited purpose, lenders limit the potential pool of creditors and other operational risks • Purpose of the SPE should be limited in: o The transaction documents o The organizational documentation of the SPE • Nature of the limitation will depend on the SPE’s role in the transaction 26
Specific SPE Provisions: Single-Purpose Provisions • SPE’s organizational documents are the preferred locus because: o Documents are publicly available and provide public notice of the restriction o An organic restriction is less likely to become lost in the organizational files 27
Specific SPE Provisions: Debt Limitations • SPE will be prohibited from o Incurring any other debt, except a limited amount of trade payables o Granting any liens on its assets • The lender will consider any fees, expenses, indemnities, and other payment obligations required to be made by the entity in question 28
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