I had planned on starting a series about loan types today but I ran across a term I felt was important to discuss first. I expect the series on loans will instead start next month. The term in question was “single-asset entity”, this is required by many lenders for larger real estate loans and maybe a good idea for smaller operations as well. So what is a single-asset entity(SAE) or Single purpose entity(SPE)?
A single-asset entity(SAE) is a limited liability company (or S corporation) that owns only a single property or group of properties. The LLC can not be engaged in activities outside of owning, developing, or leasing the property. Lastly, substantially all of their gross revenues must come from the property.
So in essence the LLC can own a single property or group of properties like a rental community and nothing else. This means their financials can not be entangled with any other entirety or they risk losing their protective qualities. By separating the financials of the asset holding company from the original owner the property is protected from lawsuits and other legal actions against the owner.
The day to day operations of the property would be performed by a second company generally under the same ownership as the SAE though the owner is free to hire a management firm to operate the business instead. The bank may require the SAE to keep their own bank accounts and have a unique tax number as well to help separate the SAE from the owner. To protect the SAE from litigation the bank may require the firm to have no prior debts on the controlled property and they may restrict the SAE from seeking further financing while their loan is in effect. Should the LLC begin other economic actions that would change it from an SAE designation the bank will generally penalize the firm. This separation also gives the LLC some tax advantages such as the possibility of avoiding federal estate taxes.
In the event of the individual becoming insolvent their creditors can not take the asset as it is owned by the LLC and not the creator of the LLC. For the lender dealing the the SAE LLC protects them from other creditors that may want the property of the debtor. The lender would be the only creditor in the proceeding allowing them to skip much of the bankruptcy process to foreclose quicker. The lender would also be the only voter for ruling on the debtor’s reorganization plan thus helping to avoid a costly cramdown situation. Some banks may even require the debtor to agree to have an independent group approve the filing of bankruptcy proceedings thus reducing the risk to the lender. This can be a costly measure for many small SAEs leading to this “ bankruptcy remote” model to be rare.
The single purpose entirety is a different name for the single asset entity. Be careful not to confuse these with the SPECIAL purpose entity which can also be called a special purpose vehicle(SPV). SPV are also used to isolate a parent company from the risk of the child company’s activities but have a different set of rules and are beyond the scope of this article. Perhaps that will be an interesting topic for another day.
Thanks for reading,
Marcus A Baker