What Is a Single Purpose Entity?
In real estate investing, protecting assets is just as important as growing them. That’s where the Single Purpose Entity (SPE) comes into play. If you’re involved in fix and flip projects, new builds, or long-term rental holds, understanding how SPEs work can help you manage risk, simplify financing, and operate more strategically.
What Is a Single Purpose Entity?
A Single Purpose Entity is a legal structure, typically an LLC or corporation, formed to isolate a single asset or project from other assets or projects. Its only function is to own and operate one defined property or development.
The primary characteristic of an SPE is that it has no business other than the ownership and operation of the subject asset. It does not engage in other investments, business ventures, or unrelated activities. Everything it does, banking, contracts, insurance, income, and liabilities, ties back to that one property.
Why Real Estate Investors Use SPEs
SPEs are primarily used to reduce risk. By isolating a property from your other assets and investments, you create a legal and financial firewall. This protects your broader portfolio from lawsuits, defaults, or other liabilities tied to a single deal.
But the benefits go beyond just risk protection.
1. Liability Containment
If something goes wrong, such as a contractor suing over a payment dispute or a tenant filing an injury claim, the liability generally falls to the SPE. Your other assets, even other LLCs or properties you own, are not automatically exposed.
2. Cleaner Financing
Lenders, especially in hard money and commercial real estate, often require borrowers to use an SPE for the project they’re funding. It allows the lender to clearly see the cash flow, expenses, and legal standing of the property without it being tied up in unrelated activities.
In many cases, the lender will request that the SPE be newly formed, bankruptcy-remote, and not commingled with other entities.
3. Simpler Accounting
Using an SPE allows you to run project-specific financials with clarity. You know exactly how much income, debt service, capital expenditure, and profit a particular property is generating. This makes it easier to evaluate project performance or prepare for a future sale.
4. Better Exit Planning
When it’s time to sell, having a property held in an SPE allows for more effortless legal and operational transfer. In some cases, especially with commercial assets, a buyer might acquire the SPE itself rather than the property, simplifying the transaction.
Common Situations Where SPEs Are Used
SPEs show up across a variety of real estate investment strategies, including:
- Fix-and-flips: Short-term projects that require isolated risk and clean financing.
- New construction: Keeps the development process separate from the rest of the investor’s portfolio.
- Buy and hold rentals: Investors who manage multiple rental properties often hold each in a separate SPE.
- Joint ventures: Multiple investors or partners may create an SPE to keep the partnership limited to a single project.
- Bridge loans or hard money loans: Many lenders will only fund if the asset is held in an SPE, protecting their position.
How SPEs Work in Practice
Let’s say you’re an investor building a small multifamily property in Phoenix. You create an LLC specifically for this project. The LLC opens its own bank account, signs the construction contract, obtains a hard money loan, and receives rental income upon completion.
This SPE keeps the project's risks siloed. If you take on a new development next year, you’ll form another SPE for that one.
That separation means if the Phoenix deal underperforms or runs into legal issues, your new project and any others you own aren’t automatically exposed to the fallout.
Features Lenders Look for in SPEs
Hard money lenders like Unitas Funding often require the use of SPEs because they create clarity and reduce risk. But simply creating an LLC isn’t always enough. Lenders may have specific requirements for the SPE, including:
- No commingling of assets or revenue from other ventures.
- No shared ownership structures with conflicting interests.
- No other debt outside the subject loan.
- Bankruptcy remote provisions, especially in higher-value deals.
- Independent bank account and books, with clean financial tracking.
If you’re applying for financing, be ready to show that your SPE was set up correctly and operates independently.
Considerations When Forming an SPE
Creating an SPE isn’t tricky, but it must be done correctly. Here are a few things to keep in mind:
- Legal formation: Work with an attorney or advisor to set up your LLC or corporation in the right state.
- Operating agreement: Clearly define the purpose of the entity and restrict it to managing the specified asset.
- Separate accounting: Use dedicated software or an accountant to track the SPE’s income and expenses.
- Insurance: Policies should be written in the name of the SPE and aligned with the specific property.
- Compliance: Stay current on annual filings, taxes, and other state requirements to keep the entity in good standing.
SPEs vs. Holding Companies
An SPE is not the same as a holding company. A holding company might own multiple assets, while an SPE is formed for just one. In some structures, a holding company may own several SPEs underneath it, each holding its own property. This is a common approach for larger investors or firms managing many separate deals.
In real estate, every deal carries some level of risk. A Single Purpose Entity helps contain that risk. Whether you’re working with partners, borrowing hard money, or managing a growing portfolio, SPEs make your operations cleaner and more defensible.
Unitas Funding specializes in hard money loans for real estate professionals who use SPEs to manage and grow their portfolios. Whether you’re flipping, building, or refinancing, we help you structure deals that make sense for the asset—and protect your bigger picture.
Tell us about your next project. Visit unitasfunding.com to get started.