5 Things to Know About SPV's for Your Business

What Is a Special Purpose Vehicle? A Special-Purpose Vehicle (SPV) Company, also known as Special Purpose Entity (SPE), refers to a limited company that is created as a subsidiary of a parent company or sponsoring firm.

Often masked behind the financial tables, Special-Purpose Vehicles are increasingly becoming the headline subject of the recent business arena. According to the Wall Street Journal, Business firms have now turned their focus to SPV's as a smart way to own assets, raise debts levels, and minimizing risks while maximizing profits.

Want to know more about SPV’s? Here are five things you should know about Special Purpose Entities.

Legal Entity

You may be wondering whether an SPV is a legal company or not? Well, SPV’s are perfectly legal companies formed for a specific and limited purpose such as a single investment. Often, SPV’s are created as a Limited Liability Company or Limited Partnership (LP). Company.

The legal status of an SPV makes it a separate company with secure obligations even if the parent company is declared bankrupt. Typically, Mortgage lenders prefer lending money to SPV’s, and this is because the objects in the articles restrict SPV’s to venture into other areas of business apart from their initial purpose.

Additionally, when lending to SPV’s, lenders tend to ease the stress-testing on rental calculations, thus allowing borrowers to borrow at maximum.

Risk sharing

You will agree with me that any business project entails significant risks, that is the reason why most business firms need to have SPV’s. Special Purpose Entities usually enables business corporations to legally isolate the risks of their projects and then share the risk with other investors.

SPV's are an excellent platform for Financial risk management, and that is because they segregate specific activities (risks) from the firm’s core projects. SPV's mainly isolate high-risk operations ventures from the parent company and give new investors opportunities to take shares in the very specific risky ventures.

Usually, a simple and straightforward balance sheet is used since SPV's are created for a single objective only. The lack of debt obligations is quite a reasonable risk for both firms and investors.

Securitization

Securitization of loans is typically the most common reason behind the increasing creation of SPV’s. The financial statements of SPV's do not appear on the parent company's balance sheet as a debt or equity. Instead, SPV's equity, assets, and liabilities are recorded on their balance sheets.

Therefore, SPV’s often hide crucial information from investors, especially investors who are not very keen on getting the full view of a firm’s financial situation. Thus smart investors need to critically analyze the balance sheet from both the parent company and the SPV before deciding to invest in the business.

Asset transfer

According to the European System of Central Bank’s (ESCB), publication, SPV’s are frequently used in structured finance transactions, such as for asset transfer, asset securitizations as well as isolation of certain company assets or operations. At times some types of assets can be challenging to transfer.

On such a challenge, a company may decide to create an SPV agreement to own such assets. Thus when the company wants to transfer the assets, then it is simple to do so by merely selling the SPV as part of a merger and acquisition process.

Property sale

Business organizations' may consider creating an SPV for the owning properties for sale, if the properties being sold have high taxes that the capital gain. Thus the organization can sell the SPV instead of the individual properties, and then taxes can be paid on the capital gain.

Additionally, you can use SPV can for multiple properties, thus allowing you to build a portfolio within one entity while reducing admin and ongoing costs.

One last thing you should know about SPV’s is that it is a legal entity consisting of a set of legal documents. SPV’s can be a financial subsidiary, or a holding company, a limited liability company, a new corporation, a trust, or a partnership.

However, at times SPV’s can be illegal if it is used in some unlawful ways such as tax evasion, misstatement of earnings, and avoidance of regulatory restrictions.