SPE Requirements for a CMBS Loan: What Lenders Actually Ask For

A borrower gets a term sheet from a CMBS lender or debt fund lender and finds a line item requiring the borrower to be a "single-purpose, bankruptcy-remote entity satisfying the lender's SPE requirements." A few weeks later, a draft loan agreement or checklist arrives with several pages of separateness covenants, a requirement for an independent director or manager, and a request for a non-consolidation opinion from the borrower's counsel.

For sponsors who have only done balance sheet or bank financing, this is often the first encounter with these requirements. The requirements are not negotiable in any meaningful way; they are enforced by rating agency criteria rather than by the individual lender's preference, and the cost of discovering them late is measured in closing delays and frustrations.

This is a practical walkthrough of what CMBS lenders require at the entity level, why each piece exists, and which items need to be resolved before the term sheet is signed rather than during document negotiation.

Why CMBS Loan Requirements Exist

A CMBS loan is not held by the originating lender. It is pooled with other loans, transferred to a trust, and sold to bond investors as securities. Those investors are buying exposure to specific properties and specific cash flows. They are not underwriting the sponsor's other holdings, other lenders, or other problems.

That is only true if the borrowing entity is genuinely separate from everything else the sponsor owns. If the sponsor's other ventures fail and the borrower can be pulled into that proceeding, or if the sponsor can put the borrower into bankruptcy for tactical leverage while the property is still performing, the isolation investors paid for does not exist.

Everything below follows from that. The requirements are not paperwork. They are the structure the bond investors are relying on, which is why the rating agencies police them and why lenders have limited discretion to waive them.

The Core Requirements

Single purpose and single asset

The organizational documents must limit the entity to owning and operating the one property and doing what is necessary to run it. No other business, no other assets, no unrelated ventures.

The corollary matters just as much: no other debt. The entity generally cannot incur indebtedness other than the loan and ordinary trade payables incurred in the ordinary course and paid within a defined period. A sponsor accustomed to moving money between entities, or to letting an affiliate lend into a property, will need to stop doing that at closing.

Separateness covenants

CMBS loan documents typically carry a list of roughly twenty separateness covenants. They are tedious, and they are the substance of the deal. The recurring ones require the entity to:

• Maintain its own books, records, accounts, and financial statements, separate from any affiliate

• Refrain from commingling assets or funds with any other entity

• Hold itself out to the public as a separate and distinct entity

• Use its own name for invoices, checks, and bank account names

• Conduct business with affiliates on arm's length terms

• Fairly allocate any shared overhead or expenses

• Refrain from guaranteeing or becoming obligated on the debts of any other entity

• Maintain adequate capital for its contemplated operations

• Observe organizational formalities

These are ongoing operational obligations, not closing conditions. They bind for the life of the loan, and they are the covenants most often breached inadvertently by sponsors who run several properties through shared bookkeeping.

An independent director or independent manager

The entity must have at least one independent person on its governing body whose consent is required before the entity can file for bankruptcy, consent to an involuntary filing, dissolve, merge, sell substantially all assets, or take other enumerated material actions.

The title depends on entity type, and the distinction is not cosmetic. A corporation has an independent director. A limited liability company has an independent manager, and in some formulations an independent member. Because most CMBS borrowers are Delaware limited liability companies, independent manager is usually the correct term, and mixed usage across a document set signals that the provisions were copied from a template without a close read.

The person must have no material relationship with the borrower, the sponsor, or their affiliates, and must be provided by a recognized service provider rather than being an accommodating acquaintance of the sponsor. Lenders and rating agencies maintain views on which providers are acceptable.

On thresholds, published practitioner guidance indicates that lenders may waive the independent requirement on smaller loans, commonly in the range below roughly $15 million, and may require two independents on larger loans, commonly at or above roughly $50 million. Treat those figures as typical rather than fixed. They vary by lender, by rating agency criteria in effect, and by the specific deal.

A springing member, for limited liability companies

A Delaware limited liability company with a single member can be dissolved easily and the for bankruptcy-remote structures thisis a real problem, because the sponsor above the borrower is exactly the party most likely to fail.

The springing member provision solves it. A designated person becomes a member automatically if the sole member ceases to be one, preserving the entity's existence so that the collateral stays where it is supposed to be. The springing member holds no economic interest and has no operational role.

This is a distinct requirement from the independent manager, and satisfying one does not satisfy the other. Some structures use the same provider for both, but they are separate appointments doing separate work.

A non-consolidation opinion

Above a size threshold, commonly cited at $15 million range and varying by lender, borrower's counsel must deliver a reasoned opinion concluding that in a bankruptcy of the sponsor or an affiliate, a court would not substantively consolidate the borrower's assets with that entity's.

Two things about this opinion catch borrowers off guard. Counsel has to reach a reasoned conclusion and formal legal opinion based on the structure and the facts. If the entity has commingled funds, shares a bank account with an affiliate, or has no independent governance, counsel may not be able to deliver the opinion, and the deal stops.

It can be required again after closing. A guarantor substitution, the engagement of a borrower-affiliated replacement property manager, or certain equity transfers can each trigger a new opinion requirement. Sponsors planning a management change or an internal restructuring during the loan term should know that before they plan it.

Newly Formed Versus Recycled Entities

CMBS lenders strongly prefer that the borrower be a newly formed entity with no operating history, because a clean entity cannot have prior liabilities.

Using an existing entity that already holds the property is possible, but the entity has to satisfy the lender's recycled entity requirements, which follow rating agency criteria. In practice that means certifying that the entity has always operated as though the SPE requirements had been in place since its formation. For a sponsor who has been running the property through a shared account for a decade, that certification is not available.

This is the single most important item to resolve before signing the term sheet, because the alternative to recycling is transferring the property into a new entity, and that transfer can trigger transfer taxes, property tax reassessment, and licensing or permit reissuance. Those costs can be substantial, and they land on the borrower. Discovering the problem during document negotiation means either absorbing them under time pressure or restructuring the deal.

How Long Compliance Lasts

SPE covenant compliance runs until the earliest of loan payoff, assignment of the note and mortgage in a refinancing, or assumption of the loan by a new borrower. It is not a closing exercise that ends when the deal funds.

That matters because the operational covenants are the ones most easily breached over a multi-year term through ordinary sloppiness. A property manager who starts running expenses through a shared affiliate account, an accountant who consolidates the financials for convenience, or a sponsor who lets the entity guarantee an affiliate's obligation can each create a breach that surfaces years later, usually at refinancing or in a workout, when the consequences are least manageable.

The same applies to the independent seat. An appointment made at closing is not self-maintaining. Providers merge, exit the business, or resign, and named individuals stop serving. A structure whose independent manager is no longer actually in place has a gap that appears at exactly the wrong moment.

What to Resolve Before Signing the Term Sheet

A short list, in order of how expensive each is to fix late.

1. Can you recycle the existing entity, or do you need a new one? 

   Confirm this first. It drives transfer tax exposure, reassessment risk, and timeline.

2. Is the entity type right for the requirements? 

   A Delaware limited liability company with a springing member is the standard CMBS structure. If you are holding the property in something else, find out now what conversion involves. 

3. Will the loan size trigger two independents, or a non-consolidation opinion? 

   Both have cost and lead time. Neither should be a surprise in week three.

4. Does the entity's operating history support the opinion? 

   If there is commingling, affiliate debt, or shared accounts in the entity's past, counsel needs to see it early, not at the opinion draft stage.

   
   

5. Do you have an independent provider identified and acceptable to the lender? 

   Confirming acceptability and getting the appointment documented takes time that is usually not budgeted.

Building Resilient Structures

At SPE Specialists, we provide independent director, independent manager, and springing member services for special purpose entities in commercial real estate and structured finance. We review the governing documents substantively rather than simply signing a signature page, because the provisions that determine whether a structure holds are written long before anyone needs to rely on them. We do not provide non-consolidation opnions because those come from counsel but we can refer you to providers.

If you are working through SPE requirements on a CMBS financing, or need to confirm that an existing appointment is current before a refinancing or assumption, we are glad to discuss it.

This article is provided for general informational and educational purposes. It is not legal advice, and it does not create an attorney-client or advisory relationship. SPE Specialists provides governance services and does not practice law. Requirements vary by lender, by rating agency criteria in effect, by jurisdiction, and by the specific documents governing a transaction, and the dollar thresholds described above are typical rather than fixed. Readers evaluating a specific structure should consult qualified counsel.

Sources

• Representing the Borrower in a CMBS Loan, Fried Frank (Lexis Practice Advisor)

• The Unique Aspects of CMBS Loans: A Primer for Borrower's Counsel, Holland & Knight

• Bankruptcy Remote Structures: Recent Nonconsolidation Opinion Developments, Alston & Bird / CREFC