Benefits and Pitfalls of Using Independent Directors: Are They Always Worth It?

Benefits of Independent Directors

1. Enhanced Creditor Protection

Independent directors act as a safeguard against voluntary bankruptcy filings, ensuring that the SPE isn’t pulled into insolvency due to a parent company’s financial distress. This helps protect lenders' collateral and reduces exposure to affiliate risk.

2. Improved Credit Ratings

Their presence is often a key factor in achieving investment-grade ratings. Rating agencies value the added stability and objective governance independent directors provide.

3. Lower Financing Costs

Because they reduce perceived credit risk, independent directors can help borrowers secure better loan terms—lower interest rates, better covenants, and access to a broader pool of lenders.

4. Greater Market Liquidity

Deals backed by bankruptcy-remote SPEs with independent directors are more likely to be accepted in secondary markets, making them more tradable and attractive to institutional investors, enhancing the liquidity of the market.

Potential Pitfalls and Considerations

1. They’re Not Infallible

Independent directors reduce the likelihood of bankruptcy, but they can’t prevent it entirely. Courts may override their authority if public policy requires it, or if their independence is compromised.

2. Information Gaps

Because most independent directors are not involved in daily real estate operations, independent directors may lack full insight into the SPE’s financial health or operational realities. This can create informational blind spots at critical decision points.

3. Questionable Independence

If the director is too closely aligned with the lender or borrower or selected without proper due diligence, courts may question their objectivity, potentially undermining the structure.

4. Cost and Complexity

Engaging an independent director adds administrative costs and requires coordination with legal counsel, lenders, and service providers. While generally modest, these costs can be a factor for smaller deals of less than $10 million.

Making the Right Call

Despite the potential drawbacks, independent directors are almost always worth the small investment, especially in transactions seeking third-party capital or credit ratings. The key is to:

1. Work with reputable service providers

2. Maintain clear governance documentation

3. Ensure directors are truly independent and understand their fiduciary duties

How SPE Specialists Mitigates the Risks

At SPE Specialists, we:

1. Assign independent directors with structured finance and legal experience

2. Provide onboarding, transaction context, and responsive support

3. Maintain rigorous independence standards to ensure legal defensibility

4. Collaborate with your legal and capital markets teams to ensure alignment

We don’t just supply a name; we provide qualified fiduciaries who understand the stakes and are real estate experts.

Next: Where Independent Directors Add Value, Key Use Cases Across Structured Finance. We’ll explore common transaction types: CMBS, ABS, project finance, and more, where independent directors are essential to the structure and success of the deal.