Actualités

Single Entity Rule Loan
30 novembre 2022

So what characteristics must be present for a business to be legally recognized as a “single-purpose entity”? Since the essence of a special purpose is that it exists only for one purpose, such as the ownership and operation of a particular commercial good, the most fundamental element of a special purpose entity is a good “purpose clause”. There are deviations from the common provisions of a purpose clause, but it must essentially have the desired effect of explicitly indicating the existence of restrictions on the SPE`s rights to engage in activities that would otherwise be authorised by an ordinary legal person. The purpose should be contained in a public document, such as in governing documents submitted to the Secretary of State`s office. This may not always be practical for lenders, but at least it should be included in loan documents, usually in the loan agreement. In addition to the purpose clause, creditors should also require a number of agreements aimed at strengthening the separation between the SPE and other related entities or undertakings, for example by preventing the mixing of assets and prohibiting the guarantee of the obligations of other entities, or the obligation for the SPE to keep its own tax identification number and have its own bank accounts. Lenders may also impose restrictions on other measures that general purpose corporations can normally take, such as the ability to take on more debt or the right to voluntarily seek bankruptcy protection. There is a common set of elements associated with SPEs, but there are no clear uniform criteria for being considered SPEs. According to section 414 (m) of the Code, an “affiliated service group” is treated as a single employer on the basis of rules relating to the provision of services by one enterprise to another or by an enterprise in relation to another to third parties, even if the company does not have sufficient ownership or control over the other company. to form a controlled group. If you are a business person who wants to obtain a loan for the purchase of commercial real estate, the lender may require you to own the property in a single-purpose corporation (usually a limited liability company (“LLC”) or corporation). If you are a lender able to finance your borrower`s commercial acquisition, it is often advisable to let the borrower form a single-purpose company that owns the property. But what is a single-use vehicle, why are they often an important part of the real estate transaction and how are they legally established? Under the section 52 rules, corporate taxpayers may be required to amalgamate as a parent-subsidiary, a sibling-controlled group or a group of combined corporations. Section 52(a) of the Code generally describes a group of companies controlled by parent subsidiaries as one or more chains of corporations in which the joint parent company holds more than 50% of the total combined voting rights of all classes of voting shares or more than 50% of the value of all classes of shares of each corporation.

A group of companies controlled by brother and sister generally consists of two or more corporations if: (1) five or fewer persons who are individuals, estates or trusts hold at least 80% of the total voting rights of all classes of voting shares or the total value of the shares of all classes of shares of each corporation; and (2) the same five or fewer persons, taking into account ownership only to the extent that it is identical in respect of each corporation, hold more than 50 per cent of the total voting rights of all classes of voting shares or of the total value of the shares of all classes of shares of each corporation. A combined corporate group consists of three or more companies, each of which is either a member of a parent-subsidiary or a group controlled by a sibling, and at least one of which is both the joint parent company of a group controlled by a parent subsidiary and a member of a group controlled by a brother and sister. For the purposes of determining an employer`s eligibility and the amount of employee retention credits, any entity that is treated as an employer for the purposes of the retention credit under section 52(a) or (b) of the Internal Revenue Code (the “Code”) or section 414(m) or (o) of the Code. The consolidation rules in paragraphs 52(a) and (b) generally apply in determining whether affiliates are treated as a sole employer for the purposes of tax credits available to an employer under section 51 of the Code, as well as other provisions of the Code. The rules in paragraphs 414(m) and (o) generally apply in determining when affiliates, including affiliated service groups, are treated as a sole employer for the purposes of pension benefits and other benefit requirements under the Code, as well as other provisions of the Code. As might be expected, depending on the nature of the agreements, restrictions and other obstacles that the SPE and its owners are likely to encounter, the cost of complying with the requirements of the SPE may become increasingly onerous, in particular if the SPE is expected to use an independent AIFM to maintain the gap from insolvency. As with most things, there is a trade-off between what the lender must require to ensure adequate protection of SPEs and the tolerance that the borrowing company will exercise in seeking the financing it desires, which will depend largely on the nature of the particular circumstances and the size of the transaction. In general, a lender is advised to require the company owning the property to become a special purpose vehicle, and for the same reason, the structuring of special purpose entities by the owners of the company is often advised and is often used by experienced businessmen as a valuable form of asset and liability protection. A single-use vehicle, not to be confused with its larger relative, the special purpose vehicle (both commonly abbreviated as “SPE”), linked to a commercial real estate transaction is a limited liability company or a company that holds ownership of certain assets in which the financier holds a mortgage but has no other assets or liabilities.

Often, the SPE will contract with a second company with the same landlords to manage the property, manage tenant leases, handle business operations, and incur all responsibilities related to managing the commercial property, or it will engage a third-party management company to do so. This SPE structure is often required by lenders because it isolates the lender`s collateral (the asset on which they have the mortgage) from the claims of other creditors and restricts the owner`s activity, thereby protecting the lender and SPE owners from independent claims by third parties seeking to target the asset in question as a source of enforcement.