Special purpose vehicles for building development
Special purpose vehicles (SPV’s) are widely used as a means of securitisation for property based financial products. In development and construction, SPV’s are legal entities set up for a specific purpose to isolate risk. They are designed to prevent adverse risk being transferred to or from the owners of the SPV, the operations of which are limited to the acquisition and financing of specific property assets.
Most commonly, the SPV is in the form of a subsidiary company with an asset, liability and legal status that ensures independence and makes the SPV’s obligations secure even if the parent company were to become insolvent. Conversely a parent company can use an SPV to finance a large project without putting the entire business at risk.
SPV’s can also be used for partnering and joint ventures with the shareholding reflecting the participants contributions. It can also allow investors opportunities which would not otherwise exist, creating a new source of revenue generation for the sponsoring firm.
The Enron financial scandal gave SPV’s a bad name. Ignoring transparency and exploiting a financial loophole, Enron was able to hide losses and overstate earnings. This first led to soaring share value but ultimately caused its bankruptcy, leaving its shareholders with losses of 11 billion USD. Several directors were found guilty of fraud.
Lessons learnt from the scandal have led regulators to adopt strong new measures, subjecting SPV’s to much more scrutiny, governance and transparent reporting. This is backed by a legislative framework focusing on which organisation has control of the underlying asset held in the SPV.
SPV’S in the form of limited companies, partnerships or trusts can be registered outside the country of operation, and this can be used as a strategy to avoid tax that would otherwise be payable.
The creation of an SPV can sometimes lead to lower funding costs when the assets to be purchased and owned by the SPV are judged by lenders to be a greater quality of collateral that the credit quality of the sponsoring corporation.
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