This term refers to a person or entity that is inserted into a limited liability company operating company for the sole purpose of making it not possible for the LLC to declare bankruptcy. This is often a lender requirement in connection with large borrowing transactions to avoid the difficulties of the lender, as a secured party, getting the property out of the bankruptcy proceeding. The special member has no ownership interest in the property held in the LLC. This same role is sometimes structured as that of an Independent Director or an Independent Manager. Special Member and Independent Director services, along with similar services such as Independent Manager, Springing Member, and Independent Member, provide bankruptcy remoteness to lenders, isolating them from any potential insolvency or bankruptcy risks in commercial real estate financing transactions. Accruit and its subsidiaries have been providing these services for over 15 years.

When making real estate loans, lenders have a first mortgage on the property so that, in the event of a borrower default, the lender does not risk losing its security interest or position. However, just being subject to the bankruptcy proceedings can impede the lender’s efforts to take the property back. For this reason, these loans typically require a new special purpose entity (SPE) LLC to be created by the borrower to hold title to the property.

In order to prevent this type of SPE LLC from declaring bankruptcy, a separate party, such as a “ This term refers to a person or entity that is inserted into a limited liability company operating company for the sole purpose of making it not possible for the LLC to declare bankruptcy. This is often a lender requirement in connection with large borrowing transactions to avoid the difficulties of the lender, as a secured party, getting the property out of the bankruptcy proceeding. The special member has no ownership interest in the property held in the LLC. This same role is sometimes structured as that of an Independent Director or an Independent Manager. Special Member or Independent Director,” is inserted into the LLC’s operating agreement, whose accordance is required in filing bankruptcy. The operating agreement further stipulates that the separate party agrees in advance not to allow the property to go into bankruptcy.

This practice first appeared in the commercial mortgage backed securities (CMBS) market many years back, and it was found that those securities that had adopted this bankruptcy remote feature were rated more favorably by agencies like Standard & Poor’s (S&P). Conventional institutional lenders, such as large insurance companies and pension funds, quickly determined that their loans would also be best served if they also had a bankruptcy remote nature as well.