When buying commercial real estate, an investor takes on unique risks in return for a unique reward. One way that a buyer or lender might mitigate some of those financial risks is to use a special purpose entity. What is a special purpose entity? And why might it be a good choice for your transaction? Here are a few answers. What Is a Special Purpose Entity? A special purpose entity (SPE) is one type of a group of business entities that may be created and used in order to own, protect, and manage a specific asset. An SPE generally can be structured as many types of businesses, including a trust, limited liability company, or corporation. Such an entity would be separate from other businesses you own as well as yourself as an individual. What Benefit Does This Offer the Lender? Many commercial real estate buyers are asked by the lender to form a special purpose (or single purpose) entity. Why does the lender want this? The answer largely comes down to protection in case of bankruptcy. When the property they lend against is owned by an individual or company with other assets and obligations, a bankruptcy filing could affect that property. Its value may be grouped in with other assets for use in satisfying unrelated obligations. Other creditors could also try to come after the property to satisfy their own debts. On the other hand, a property owned by a separate entity is not useful for the debts of a different individual or company. Even if those two entities share the same ownership, they are designed to be legally protected from the actions of one another. This reduces the risk of loss by the lender. What Benefit Does This Offer the Buyer? If the lender wants a SPE in order to boost bankruptcy protection for themselves, what benefit does that you? To begin with, you also get some bankruptcy protection. Separating the property from yourself or your other business endeavors means that you may be able to continue to own it even if you do have to declare bankruptcy for other entities. Forming certain types of business entities is also a good idea to protect yourself from other hazards. Real estate investment can be somewhat risky. If your investment company faces bankruptcy, your personal assets will be separated by many business entity types. If the SPE is sued for damages, such as by an injured tenant, your personal assets are once again protected from seizure. Certain business entities are also conducive to raising new capital. Both an S corporation and a C corporation can sell shares of interest in order to bring new money into the venture without additional debt. Partnerships can split up responsibilities, bring in new money, and add to or reduce ownership. Conversely, an individual has limited options to raise capital — usually only by borrowing from others. Finally, an SPE can streamline both the buying and selling processes. Because the owner is a separate entity — rather than part of a larger business or yourself individually — you will likely have fewer contract complications as well as lending delays. What Should You Know? While an SPE could be the perfect match for your commercial real estate purchase, you shouldn't enter into one with professional assistance. In order to gain the benefits, you need to create a business structure that meets the lender's requirements but also protects your own interests. At Donald B. Linsky & Associate PA , we know real estate law. Let us help you craft the right SPE and ensure that your real estate transaction fits your needs. Call today to make an appointment.