What is a Bankruptcy Remote Entity?
Bankruptcy Remote Entities and HUD 223(f) Loans
HUD 223(f) borrowers are required to structure their borrowing entity as a bankruptcy remote entity. This means that, if the borrowing entity’s parent company declares bankruptcy, it will not likely affect the financial status of the borrowing entity itself. This protects both the borrower, lender, and HUD from any unexpected financial complications.
How are Bankruptcy Remote Entities Structured?
In order to be bankruptcy remote, an entity will often be structured as a special purpose entity (SPE), also often known as a single asset entity (SAE), since these entities typically only hold one asset- a piece of multifamily real estate. SPEs are usually themselves structured as limited partnerships (LPs), or limited liability companies (LLCs).
The Downsides of Bankruptcy Remote Entities
While bankruptcy remote entities have a variety of major upsides for borrowers and lenders, they do have one major downside; in most cases, if a property is losing money, the borrower cannot inject cash into the property in order to save it from foreclosure. However, they may be able to get a HUD 223(d) operating loss loan in order to inject some cash into the property and give it time to stabilize.