For real estate lenders, one of the holy grails is the loanstructure that renders borrowers bankruptcy proof. However, asrecent cases have shown, there is no such thing as bankruptcyproof, particularly for entities owning and operating commercialreal estate. Take, for instance, General Growth Properties'bankruptcy case. The retail company's property-owning subsidiariesfiled for Chapter 11 despite bankruptcy remote structures andsuccessfully defended the filings from legal challenge.

Bankruptcy remote structuring usually requires the borrower tobe a special purpose entity, whose activities are restricted toowning and operating the asset financed. These entities areunlikely to have other creditors because of limitations in theorganizational documents, which notify creditors to unauthorizedactivities and debt. An SPE also minimizes the risk of the borrowerbeing substantively consolidated into other related entities inbankruptcy by requiring the entity to comply with a variety ofseparateness covenants. These covenants oblige the entity to holdassets and conduct business only in its own name and observe legalentity formalities.

Bankruptcy remote structures often minimize the borrower'svoluntary bankruptcy by requiring the use of independent directors,and making the loan fully recourse to a parent entity, sponsor orprincipal, should the borrower file for bankruptcy or fail toobserve the covenants. Lenders generally make their loans fullyrecourse through "bad-boy" guarantees, often referred to asspringing recourse guarantees or non-recourse carve-outguarantees.