For real estate lenders, one of the holy grails is the loan structure that renders borrowers bankruptcy proof. However, as recent cases have shown, there is no such thing as bankruptcy proof, particularly for entities owning and operating commercial real estate. Take, for instance, General Growth Properties’ bankruptcy case. The retail company’s property-owning subsidiaries filed for Chapter 11 despite bankruptcy remote structures and successfully defended the filings from legal challenge.

Bankruptcy remote structuring usually requires the borrower to be a special purpose entity, whose activities are restricted to owning and operating the asset financed. These entities are unlikely to have other creditors because of limitations in the organizational documents, which notify creditors to unauthorized activities and debt. An SPE also minimizes the risk of the borrower being substantively consolidated into other related entities in bankruptcy by requiring the entity to comply with a variety of separateness covenants. These covenants oblige the entity to hold assets and conduct business only in its own name and observe legal entity formalities.

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