Financing a Development Project Through a Special Purpose Vehicle (SPV): How It Works
A special purpose vehicle (SPV) is a standard tool in development financing. If you're planning a project with a bank loan, the bank will most likely require you to set one up. But what does that actually mean in practice, why do banks require it, and how does an SPV affect your options for private financing?
What is a special purpose vehicle in a development project?
A special purpose vehicle (SPV) is a separate company (usually a limited liability company, sp. z o.o., or a limited partnership, sp. z o.o. sp. k.) set up solely to carry out one specific development project. Every element of the project is organized at the SPV level:
- Ownership of the land for the development
- The building permit and project documentation
- Contracts with buyers and escrow accounts (required by Poland's Developer Act)
- The bank's development loan
- Contracts with contractors
The SPV doesn't carry out any other business activity. It exists solely to complete one project and then wind down (or take on the next project through a new structure).
Why do banks require an SPV for a development loan?
Banks require an SPV for several reasons, all tied to the financial safety of the project and of the institution:
Risk isolation
If a developer runs several projects in parallel and one of them runs into trouble (delays, rising costs, litigation), that trouble doesn't spill over into the other projects. Each one sits in its own SPV. The bank financing project A isn't exposed to the risk of the developer's projects B, C and D.
Financial transparency
The bank sees exactly every cash flow of the project: buyers' payments into escrow accounts, drawdowns of the development loan, payments to contractors. There's no "mixing" of funds between projects. The bank has full visibility into where the money goes.
Requirements of the Developer Act
The Act of 20 May 2021 (Poland's new Developer Act) requires a separate residential escrow account (MRP) for every project. That requirement fits naturally into an SPV structure.
Easier sale or restructuring
Selling a project mid-construction (when a developer wants to exit or needs investor financing) is simpler when the project sits in an SPV: the buyer acquires the shares in the company, and with them the whole project, the land, the permits and the contracts. There's no need to carve the project out of a larger company.
How does an SPV affect private (non-bank) financing?
Private financing (bridge loans, mezzanine financing, loans secured by land) takes a different approach to the SPV question than bank loans do:
- A loan secured by land through the SPV: if the land belongs to the SPV, a private lender grants the loan to the SPV and takes a mortgage on the land. This usually requires a personal guarantee from the SPV's owners, or a mortgage on the developer's other assets.
- A loan directly against the original landowner: if the land currently belongs to the individual owner or the parent company, and contributing it to the SPV is only planned for later, the lender can secure the loan before that contribution takes place.
- No SPV requirement: private lenders, unlike banks, usually don't require an SPV at all. They'll finance the developer's company directly, or even an individual, as long as the land or property provides sufficient collateral.
The SPV and taxes: key points
An SPV structure carries real tax consequences:
- Corporate income tax (CIT): as a sp. z o.o., the SPV pays 19% CIT (or 9% if it qualifies as a small taxpayer) on the project's profit
- Dividend payout: once the project is finished, profit is paid out to shareholders as a dividend, subject to a further 19% personal income tax (effective tax on profit: around 34%)
- The alternative, sp. z o.o. sp. k.: this legal form allows profit to be taxed only once, at the level of the limited partners, a popular choice among developers for mid-sized projects
- PCC or VAT on contributing the land: contributing land to the SPV may trigger a 2% civil law transaction tax (PCC) on the acquisition, or VAT if the land counts as "trading stock". This is a question to discuss with a tax advisor.
Frequently asked questions
A special purpose vehicle (SPV) in a development project is a separate company (usually a sp. z o.o.) set up solely to carry out one development project. The land, the building permit, the sales agreements with buyers, the escrow accounts and the bank loan are all organized within the SPV, separate from the developer's parent company. This isolates the project's risk, provides the financial transparency banks require, and makes it easier to sell the project to an investor.
Banks require an SPV for a development loan for several reasons: risk isolation (problems in the developer's other projects don't affect the financed project), financial transparency (the bank controls all of the project's cash flows), the requirements of the Developer Act (a separate escrow account per project), and the ease of selling or restructuring the project later. The bank gets certainty that the loan proceeds go only to the project, rather than being spread across the developer's whole business.
Yes, an SPV can get a private loan secured by real estate. The lender assesses the value of the SPV's property (the land, the building), the track record of the developer who owns the SPV, and the repayment plan. Because an SPV is usually a new company with no history, lenders often require a personal guarantee from the owners or an additional mortgage on the parent company's assets. Private lenders don't require an SPV structure. It's also possible to finance the developer directly, with a mortgage on land that sits inside the SPV.
A developer doesn't need an SPV when running a small project without a bank loan, financing the project entirely from their own funds, or relying only on private financing. Private lenders, unlike banks, usually don't require an SPV and will finance the developer's company directly, or even an individual. The decision to set up an SPV should weigh tax considerations, the scale of the project, and any plans to sell the project to an investor later.
Setting up an SPV (a sp. z o.o.) involves costs: a minimum share capital of PLN 5,000, KRS registration fees of PLN 500, legal costs at setup of PLN 500-2,000, and ongoing accounting and corporate administration costs of PLN 500-1,500 a month. Additional costs: transferring the land to the SPV (2% civil law transaction tax or VAT, plus notary fees), and registering the mortgage. The total cost of setting up and launching an SPV is usually PLN 10,000-30,000, marginal against a development project worth several to tens of millions of zloty.
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