What is a Bankruptcy-Remote Entity?
A bankruptcy-remote entity is an entity within a larger company or corporation whose bankruptcy would have little impact on the rest of the corporation. In the case of real estate investments, a bankruptcy-remote entity is often also a special-purpose entity (SPE). This means that it only has one, specific purpose (typically to own a piece of multifamily or commercial real estate.) SPEs are also often referred to as single-asset entities (SAEs). In most cases, properties purchased or refinanced with HUD multifamily loans (including the HUD 223(a)(7) refinance) need to be owned by a bankruptcy-remote entity such as an SPE/SAE.
Bankruptcy-Remote Entities and the HUD 223(a)(7) Loan Program
A bankruptcy-remote entity is an entity within a larger company or corporation whose bankruptcy would have little impact on the rest of the corporation. In the case of real estate investments, a bankruptcy-remote entity is often also a special-purpose entity (SPE). This means that it only has one, specific purpose (typically to own a piece of multifamily or commercial real estate.) SPEs are also often referred to as single-asset entities (SAEs). In most cases, properties purchased or refinanced with HUD multifamily loans (including the HUD 223(a)(7) refinance) need to be owned by a bankruptcy-remote entity such as an SPE/SAE.
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Related Questions
What is a bankruptcy-remote entity?
A Bankruptcy Remote Entity is a legal entity that is structured in such a way that, if the parent company declares bankruptcy, it will not likely affect the financial status of the borrowing entity itself. This protects both the borrower, lender, and HUD from any unexpected financial complications. However, there is one major downside; in most cases, if a property is losing money, the borrower cannot inject cash into the property in order to save it from foreclosure. Source
What are the benefits of setting up a bankruptcy-remote entity?
The benefits of setting up a bankruptcy-remote entity include protecting the borrower, lender, and HUD from any unexpected financial complications. This is because, if the borrowing entity’s parent company declares bankruptcy, it will not likely affect the financial status of the borrowing entity itself. Source
What are the risks associated with a bankruptcy-remote entity?
The main risk associated with a bankruptcy-remote entity is that, if the property is losing money, the borrower cannot inject cash into the property in order to save it from foreclosure. However, they may be able to get a HUD 223(d) operating loss loan in order to inject some cash into the property and give it time to stabilize. Source
How does a bankruptcy-remote entity protect creditors?
A bankruptcy remote entity protects creditors by ensuring that if the borrowing entity's parent company declares bankruptcy, it will not affect the financial status of the borrowing entity itself. This protects both the borrower, lender, and HUD from any unexpected financial complications. This is especially important for HUD 223(f) loans, as borrowers are required to structure their borrowing entity as a bankruptcy remote entity. Source
What are the legal requirements for setting up a bankruptcy-remote entity?
The legal requirements for setting up a bankruptcy-remote entity vary depending on the jurisdiction in which the entity is established. Generally, the entity must be structured in such a way that it is legally separate from its parent company, and that it is not liable for the debts of its parent company. Additionally, the entity must be structured in such a way that it is not subject to the bankruptcy laws of the jurisdiction in which it is established. For more information, please refer to the HUD 223(f) Loans Bankruptcy Remote Entities page.
What are the tax implications of a bankruptcy-remote entity?
The tax implications of a bankruptcy-remote entity depend on the type of entity and the jurisdiction in which it is located. Generally, a bankruptcy-remote entity is treated as a separate legal entity for tax purposes, meaning that it is subject to its own tax obligations. For example, in the United States, a bankruptcy-remote entity may be subject to federal income tax, state income tax, and local income tax. Additionally, the entity may be subject to other taxes, such as payroll taxes, sales taxes, and property taxes. It is important to consult with a tax professional to understand the specific tax implications of a bankruptcy-remote entity.