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Last edited 24 Jul 2024

Special purpose vehicles and building development

Special purpose vehicles (SPVs) are widely used as a means of securitisation for property based financial products. In development and construction, SPVs 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 SPVs 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.

SPVs 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 UK government backed 'Heat Networks Investment Project (HNIP) main scheme clarification document 'Using a Special Purpose Vehicle (SPV)' explains what is meant and understood by the term SVP:

'The term Special Purpose Vehicle (SPV) denotes a separate legal entity which is created by an organisation; a distinct company with its own assets and liabilities, as well as its own legal status. Oftentimes, SPVs are created for a specific objective (such as to isolate financial risk) and in certain instances they are a requirement for local authorities when operating trading businesses.'

'Generally, local authorities are required by law to establish an SPV to operate a trading business but this can depend on the powers they choose to use to go into that business. Local authority Applicants will be expected to have considered this when obtaining relevant internal approvals and followed an appropriate path that is within their powers.'

'There are a number of types of entity that the law recognises as having legal status separate from the person setting them up. However, most people are familiar with companies limited by shares and these are the most commonly used form of SPV for heat projects.'

The Enron financial scandal gave SPVs 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 SPVs 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.

SPVs 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.

Many construction projects, particularly where larger, higher-risk developments are concerned, create special-purpose vehicles (SPVs) or independent companies as a way to isolate risks, commonly focussed on financial risk but also other associated risks. Parent companies can use SPVs to finance large projects without exposing an entire business to certain risks, but they have also been used to effectively circumvent liability and, to some extent, responsibility, effectively cutting short limitation periods by dissolving or voluntarily liquidating the SVP.

The Building Safety Act, 2022, introduced as a result of the Grenfell tragedy created Building liability orders (BLOs) under Part 5, Section 130. These are aa mechanism that allows certain recovery rights relating to a building to extend beyond those of a subsidiary company, such as a special-purpose vehicle (SPV), to broader associated companies. The precursor to BLOs are Information Orders in which specific information about a company can be requested by a court order and used to assess whether a BLO is applicable; if it is, then a BLO application is made. If the BLO is applied for and successful, then the liability for the project lies not only with the original independent SVP but extends to any corporate body that has been associated with setting up the SPV along with any associated contractors.

NB The glossary of statistical terms, published by the Organisation for Economic Co-operation and Development (OECD), defines a special purpose road vehicle as a: ‘Road vehicle designed for purposes other than the carriage of passengers or goods.’