A Special Purpose Vehicle (“SPV”) is a separate legal entity formed by an organization with its business and legal status, assets, and liabilities. They are generally designed with a specific goal in mind often to mitigate the financial risk. SPV is often used in structured finance transactions including securitizations, joint ventures, and real estate transactions. The main feature of an SPV is that it has a separate balance sheet from the parent business. SPV is protected from the parent company’s insolvency and are permitted to function lawfully on designated assets. The SPV activities are restricted to funding and acquiring the project or real estate asset.
SPV can raise capital by issuing shares. It offers flexibility to create multiple types of shares for effective control. Moreover, holding property through an SPV means that the property and the related contracts can be sold through an isolated vehicle avoiding the complexities of extensive contracts, licensing, Government approval, Complicated contract negotiations, and most importantly tax benefits.
RISE OF SPV IN INDIAN REAL ESTATE SECTOR
Developers in the real estate sector are facing significant liquidity pressures due to low internal accrual rates and limited financing options which is impacting the industry as a whole. After the NBFC crisis in 2018, borrowing rates increased. It encourages real estate players to look for safe alternatives. In addition to these investment challenges, the sector is also facing a liquidity crisis due to fluctuating land prices, slowing demand, and increased investment costs, all of this has resulted in developers searching for alternative financing solutions, and the SPV concept has gained importance.
REAL ESTATE INVESTMENT TRUSTS
The emergence of SPV in the Indian market has led to the foundation of a new investment option for Indian investors in the form of Real Estate Investment Trust (“REIT”). This is similar to a mutual fund where many investors pool into funds that have real estate as the underlying asset class. The public will have the chance to invest in real estate developments through these REIT, which will be governed by SEBI.
SPV IN REAL ESTATE: ADVANTAGES
- SPV has the ability to reduce the risks associated with owning and managing real estate assets.
- Opportunity for investors to diversify their investments across a variety of real estate holdings, as an SPV allows them to own and manage multiple assets.
- SPV enable investors to access larger and more complex real estate transactions that may not be available to individual investors.
CREATION OF SPV IN INDIA: EXAMPLE
In November 2018, the Maharashtra Government issued global tenders to redevelop one of the largest slums in Asia, Dharavi, to turn the same into an integrated township under Rs. 22,000 crore project. The partner is required to form an SPV, holding 80 percent of the equity, while the Maharashtra Government retained the remaining 20 percent. Thus, leading SPV to build free housing for eligible slum residents and will also have the right to construct homes for sale in the open market. In addition to smart city initiatives, It is one of the largest real estate investment projects through SPV.
OBSERVATION
Special Purpose Vehicle (SPV) is a legal entity established for a specific purpose, such as managing and holding real estate assets. SPV offer investors several benefits, such as reducing risk, diversification, Limitation of Liability, and the opportunity to participate in larger and more complex real estate transactions. However, it is crucial to understand the legal and financial aspects of using an SPV before making an investment and consulting with a qualified financial advisor is recommended before proceeding with any investment decisions.
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