What is a special member, and why should you consider using one? In an effort for lenders to protect themselves against bankruptcy risks, and for borrowers to increase their S&P ratings, this additional entity was created.
This term refers to a person or entity that is inserted into a limited liability company operating company for the sole purpose of making it not possible for the LLC to declare bankruptcy. This is often a lender requirement in connection with large borrowing transactions to avoid the difficulties of the lender, as a secured party, getting the property out of the bankruptcy proceeding. The special member has no ownership interest in the property held in the LLC. This same role is sometimes structured as that of an Independent Director or an Independent Manager. Special Member or Independent Manager services provide bankruptcy remoteness to lenders, isolating them from any potential insolvency or bankruptcy risks in commercial real estate financing transactions. When making real estate loans, lenders have a first mortgage on the property so that, in the event of a borrower default, the lender does not risk losing its security interest or position. However, just being subject to the bankruptcy proceedings can impede the lender’s efforts to take the property back. For this reason, the lender’s loan commitment letter typically will require the use of a new special purpose entity (SPE) LLC created by the borrower to hold title to the property. In order to prevent this type of SPE LLC from bankruptcy, a separate party, a “ This term refers to a person or entity that is inserted into a limited liability company operating company for the sole purpose of making it not possible for the LLC to declare bankruptcy. This is often a lender requirement in connection with large borrowing transactions to avoid the difficulties of the lender, as a secured party, getting the property out of the bankruptcy proceeding. The special member has no ownership interest in the property held in the LLC. This same role is sometimes structured as that of an Independent Director or an Independent Manager. Special Member ,” is inserted into the LLC’s operating agreement, whose accordance is required in filing bankruptcy. The operating agreement further stipulates that the special member agrees in advance not to allow the property to go bankrupt. This practice first appeared in the commercial mortgage-backed securities (CMBS) market about twenty years ago, and it was found that the loans that had adopted this bankruptcy remote feature were rated more favorably by ratings agencies like Standard & Poor’s (S&P). Conventional institutional lenders, such as large insurance companies and pension funds, quickly determined that their loans would also be best served if they also had a bankruptcy remote nature.
Although these entities receive compensation on an annual basis for acting or remaining ready to act in their particular capacity, they have no interest in the profits or losses of the LLC and are not otherwise treated as a regular member.
To learn more about special member, independent manager, and springing member services, contact Accruit by emailing info@accruit.com or calling (800) 237-1031 today!
