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Real Estate Concepts - April 10, 2023

SPV Investing — The Power of Multiple

April 10, 2023

Soren Godbersen
By Soren Godbersen

SPV (Special Purpose Vehicle) Investing Definition

SPV investing, or Special Purpose Vehicle investing, involves creating a separate legal entity to pool capital for specific investment purposes, often used in real estate and venture capital.

What Is SPV Investing?

A “special purpose vehicle” (or SPV) is subsidiary company that is formed for a specific business or venture operation. As a legally distinct entity, an SPV can function remotely from its parent company, including for the purposes of making an investment. 

Why would an SPV make an investment through a subsidiary of a parent company, rather than the parent company itself? There are a few reasons, but the most notable is to provide a separation of asset ownership and legal liability from the parent company.

In EquityMultiple’s case, both of these features of the SPV structure directly benefit EquityMultiple investors. Through harnessing the power of SPV investing, we bring our investors the negotiating leverage and potential protections of a large, single-entity real estate investor. The SPV structure means that you can invest pro rata in a single legal entity, which in turn invests a significant amount in a private real estate transaction. You benefit from this SPV structure even if you contribute the minimum amount of capital (often as low as $5,000). Our typical SPV investing approach stands in contrast to other real estate investing platforms, where a passive individual investor participates directly with a sponsor, and therefore will represent a smaller portion of the total equity invested in the project.

A graph showing how SPV works

Benefits of EquityMultiple’s SPV Investing Structure

Negotiating Leverage

Let’s consider a hypothetical sponsor raising $10M in JV equity to round out a $50M capital stack for an acquisition. Let’s say the sponsor puts $2M of their own equity in as a GP (general partner), and has an additional $3M check lined up from a preexisting relationship with an LP (limited partner) investor. The sponsor has $5M of equity left to fill. 

The sponsor could raise $5M from a real estate syndication platform like EquityMultiple. Through some of these platforms, the individual investors would interact directly with the sponsor. In this less intermediated scenario, the sponsor might end up with 200 investors contributing $25,000, on average, to deliver an additional $5M in LP equity. Alternatively, the sponsor could raise capital through EquityMultiple, whose SPV model means that the sponsor only deals with a single entity investing $5M. 

As the sponsor sets their terms (e.g. the return hurdle and waterfall structure), would they rather be dictating terms to many investors participating at $25k on average, or a single entity (with considerable legal resources) participating at $5M? If you guessed the first, you guessed correctly. A $5M investor has more leverage. On flip side, however, a sponsor dealing with an SPV structure like EquityMultiple’s will have a much easier experience pooling capital, merely by interacting with one party who contributes the total $5M. EquityMultiple also provides both sponsors and individual investors the benefit of streamlining communications. 

The SPV structure brings individual investors the benefit of negotiating power, and creates a “win-win scenario” with the sponsor by streamlining the financing process.

Downstream Protections

Along the same lines, an entity contributing $5M as an LP investor holds more sway should any challenges or adverse situations arise during the lifetime of an investment. While investors who participate in an EquityMultiple SPV won’t necessarily have voting rights, the entity as a whole will have more ability to enforce covenants, seek recourse, or otherwise protect invested capital should any issues arise. 

A list of the three biggest benefits of SPV investing

Bankruptcy Remoteness

Because SPVs that make EquityMultiple investments are technically a separate legal entity, the asset or assets held by the SPV are remote from EquityMultiple as a parent company, and are therefore “bankruptcy remote.” That means that if EquityMultiple were ever to become insolvent, investments through the SPV would live on and could be taken over by a separate manager, which EquityMultiple would work to arrange. (Of course, no one at EquityMultiple expects this to happen, but think of it as another layer of downside protection.)

Are SPVs Considered LLCs?

That is often the case. Many companies create SPVs as limited liability companies (LLCs), including EquityMultiple, and that is due to the simplicity of LLC formation and their relative freedom from regulatory constraints pertaining to a non-LLC parent organization.

When set up as an LLC, an SPV can maintain its own financial records, including its own assets and debts, which are kept distinct from those of its parent company. Additionally, the flexibility of LLC structures allows for straightforward transfer of the SPV through modifications to its operating agreement.

What Are Some Other Uses of SPVs?

Companies across various industries create special purpose vehicles (SPVs) for several key reasons:

  1. Combining Resources in Venture Capital: Investors use SPVs to pool funds for new businesses or startup investments.
  2. Simplifying Asset Transfers in M&A: Hard-to-transfer assets can be placed in an SPV, which can reduce hassles during sales, mergers, and acquisitions.
  3. Loan Securitization in Banks: Banks can separate mortgage pools from other obligations by creating an SPV. This allows investors in mortgage-backed securities to receive loan payments before other bank creditors.
  4. Tax-Efficient Property Transactions: SPVs can own properties for sale, allowing companies to pay lower capital gains taxes instead of higher property sales taxes when selling.
  5. Facilitating Public-Private Partnerships: In collaborations between government agencies and private companies, particularly in the infrastructure sector, SPVs are often used to manage risk in capital-intensive projects. The private partner can limit its financial exposure by creating an SPV to absorb some of the project’s risks.

The Bottom Line

SPV investing is an innovation that benefits the self-directed, passive investor. By pooling assets in an SPV, investors can benefit by joining a collective that is “greater than the sum of its parts.” This particularly happens when the managing party for the SPV possesses considerable real estate investing experience, legal acumen, and asset management vigilance.

SPVs can help individual passive real estate investors by granting an investment’s sponsor more leverage and negotiating power.

Have questions about how a particular EquityMultiple investment is structured? Please refer to the investor packet for that investment, or feel free to reach out to ir@equitymultiple.com.

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Soren Godbersen
Soren Godbersen
Soren is Chief Growth Officer at EquityMultiple. Since the launch of the EquityMultiple platform in 2015, he has overseen customer communications and educational content development. Soren is responsible for the ongoing development of the EquityMultiple brand, ensuring a great investor experience, and pursuing sustainable growth for the company. Mr. Godbersen holds a Bachelor's of Arts in Economics from Whitman College, and his writing has appeared in publications such as GlobeSt and the CFA Institute's Enterprising Investor. Prior to EquityMultiple, Mr. Godbersen worked on major product development and marketing initiatives for SaaS companies. He holds a degree in Economics from Whitman College.

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