CRE lender standard operating procedure is to make loans to entities whose sole purpose is to own the real estate collateral. The goal (as I’ve posted about here) is to ensure the loan is not entangled in a bankruptcy related to other obligations of the borrower. From an Arent Fox article:
Lenders customarily require that the real estate projects they finance be owned by SPEs. In this context, use of the SPE structure is designed to confine the lender's risk to the particular real estate asset being financed and to avoid the problems encountered when a borrower with multiple assets files a bankruptcy petition…
The SPE structure will, in fact, isolate the property from other assets and focus the bankruptcy risk on the specific property.
So, the fact that the General Growth Properties’ bankruptcy filing includes a list 12 pages long of what appear to be more than 100 single purpose entities is causing some consternation. From Law 360, “For Commercial Market, Mall Giant May be 1st Domino:”
The number of entities that were listed on GGP's bankruptcy petition has raised the eyebrows of some attorneys who question the justification of putting solvent entities with no debt into bankruptcy in the first place.
Burroughs [Katherine A. Burroughs, a partner at Dechert] said a preliminary issue in the proceeding will be whether the court should allow the parent company to cause the independent entities to take on additional debt solely to benefit the parent.
“If GGP is successful in having these entities stay in, this could have a significant chilling effect on structured finance going forward,” Burroughs said, explaining that many structured finance deals are premised on keeping solvent entities out of the bankruptcies of parent companies.
Foley [Doug Foley, chair of the bankruptcy practice at McGuireWoods LLP] said GGP could have included these entities in the filing as a means of protecting them if the debtors had some cross-collaterization issues with other lenders.
They could also have been included to provide collateral to support the DIP loan, he said.
Nolan [Thomas Nolan, chief operating officer of GGC] said that the primary consideration for including certain properties in GGP's filing was the capital structure of each individual property, including the amount and terms of each property's mortgage.
Some properties were not included because they already have extended maturity dates, and there was nothing that could be gained from the restructuring process, Nolan explained.
A simple explanation could be that, although each asset is owned by a separate SPE, they are security for credit facilities which include many assets and which need a maturity extension (some of the org charts accompanying the filing support this theory). Or, it could be the bankruptcy equivalent of the Special Forces slogan, “Kill them all and let God sort them out.”
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