Special Purpose Vehicle (SPV)
Key Takeaways
- A Special Purpose Vehicle (or Special Purpose Entity) is a regular German capital company (e.g. GmbH)
- The SPV is created by its parent company for a very specific purpose (and time) only
- SPVs offer different benefits for investors and the parent company (e.g. issuing security tokens)
What Is A Special Purpose Vehicle (SPV) & Why Do We Need It?
German financial regulation (especially the German Electronic Securities Act eWpG) is not allowing the tokenization of physical assets like real estate directly. That is why properties you can find on the GermanReal.Estate marketplace are held by special purpose vehicles (SPVs) or special purpose entities. These SPVs offer certain benefits not just for the issuer of the real estate security token, but also for investors in our blockchain-based securities.
A special purpose vehicle or special purpose entity sounds complicated and special, but it is actually just a regular German capital company. Generally speaking, SPVs are created as GmbH (short for “Gesellschaft mit beschränkter Haftung”) which would translate to LLC (short for Limited Liability Company) or AG (short for “Aktiengesellschaft”) which would translate to a stock corporation.
While there are no differences between a regular company and an SPV from a legal perspective, there are various differences from a business perspective. SPVs are usually created by another company (parent company) for a very limited and particular task only. Let’s make the example that a German property developer wants to create a new SPV for a new property they want to build:
- Parent company (e.g. FiveRocks Development SE): German property developer that is developing multiple different projects at the same time or one after the other. As the parent company exists over the long term, its business purpose might be “Developing buildings in B locations all over Germany.”
- Special purpose vehicle (e.g. Welcome Home MG GmbH): Created by the parent company for one specific project development only. The SPV, therefore, exists only for the time until the project development is complete. Its business purpose might be “Developing and holding a building in Munich.”
Thanks to the separation of the parent company (comp. holding company) and its SPV, the financials and the risk of doing business are completely separated. That makes it also very clear to everyone looking from the outside who is doing what and who owns the property exactly. The separation offers also other benefits for the parent company and for investors.
Do you want to invest in real estate in Germany in the easiest way possible? See on our GermanReal.Estate marketplace what kind of real estate security tokens are currently available:
Benefits Of A Special Purpose Vehicle (SPV)
Creating an SPV offers various benefits for the parent company as well as other business partners of the SPV (e.g. investors). That is also why we created our SPV “German Real Estate Token 1 GmbH” for our first community token which is separated from the parent company behind GermanReal.Estate (“German Real Estate GmbH”). The benefits include the following:
Taxation: Generally speaking, the earnings of a company in Germany are taxed with 15% corporate tax + 15% trade tax (slight variations in trade tax, as well as solidarity tax, ignored here). If a company is not doing any commercial activity, it can be freed from paying trade tax. Therefore, an SPV that is just holding a property and issuing a financial security might enjoy a tax rate of 15% only (compared to rental income that is taxed on a personal income tax level with up to 45%).
Share deal: In a regular transaction (from person to person), a property is transferred from seller to buyer. This transaction involves notary fees and taxes based on the property value. Instead of transferring the property itself, the seller could also transfer the SPV holding the property (share deal). A share deal will produce the same result (the desired property is transferred from seller to buyer), while significantly reducing the fees and the taxes involved in the transaction (like on our blockchain).
Private: SPVs are not forced by German financial regulation to be publicly traded companies (unlike REITs or real estate ETFs). SPVs just have to be separate legal entities (e.g. GmbH) but can be held in private ownership. Therefore, the costs of an SPV are significantly lower than the costs of a publicly traded company (e.g. no investor relations department) which increases returns and passive income for investors.
The benefits of SPVs (e.g. the decreased tax rate on a company level) allow us to increase returns for our investors that invest in real estate security tokens on our GermanReal.Estate marketplace (Security tokens are better than REITs).
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Great piece of writing with immensely informative contents! I really liked the writing style and the whole process of the story building. Waiting for more posts! Cheers!!
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