{"id":250,"date":"2026-06-16T01:24:13","date_gmt":"2026-06-15T16:24:13","guid":{"rendered":"https:\/\/gaap-bridge.com\/?p=250"},"modified":"2026-06-16T01:24:13","modified_gmt":"2026-06-15T16:24:13","slug":"spc-05-understanding-the-capital-structure-of-an-spc","status":"publish","type":"post","link":"https:\/\/gaap-bridge.com\/?p=250","title":{"rendered":"SPC 05 &#8211; Understanding the Capital Structure of an SPC"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Hello everyone, Global CPA here ??<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In the previous articles, we discussed why companies establish SPCs, how True Sale is evaluated under IFRS, and who ultimately controls an SPC.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Today, let&#8217;s take a step back from accounting standards and focus on a more fundamental question.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><span style=\"text-decoration: underline\">Why do SPCs issue Senior Debt, Preferred Units, and Common Units instead of simply borrowing money from a bank?<\/span><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">At first glance, the structure may appear unnecessarily complicated. However, each layer exists for a specific reason.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Understanding these layers is essential because they ultimately determine who bears risk, who receives returns, and how the economics of the transaction are distributed.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>A Typical SPC Structure<\/strong><\/li>\n<\/ol>\n\n\n\n<figure data-spectra-id=\"spectra-eee3e01c-1852-4aa1-9a19-cf5a1efbcdab\" class=\"wp-block-image size-large\"><img fetchpriority=\"high\" decoding=\"async\" width=\"1536\" height=\"1024\" src=\"https:\/\/gaap-bridge.com\/wp-content\/uploads\/2026\/06\/spc03.png?w=1024\" alt=\"\" class=\"wp-image-237\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">In the above example:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>ABC Corp. transfers a property into a trust structure.<\/li>\n\n\n\n<li>The beneficial interest is transferred to DEF Fund.<\/li>\n\n\n\n<li>DEF Fund raises capital through multiple layers of financing.<\/li>\n\n\n\n<li>ABC Corp. continues to operate the property through a lease arrangement.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">At this point, many readers ask:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><span style=\"text-decoration: underline\">Why doesn&#8217;t DEF Fund simply borrow money from a bank?<\/span><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">The answer lies in one simple concept:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Different investors have different risk appetites.<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\">2. <strong>Not All Investors Want the Same Risk<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Imagine that you have USD 100 million available to invest.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Some investors prioritize:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Capital preservation<\/li>\n\n\n\n<li>Stable income<\/li>\n\n\n\n<li>Low risk<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Others are willing to accept:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Higher volatility<\/li>\n\n\n\n<li>Greater uncertainty<\/li>\n\n\n\n<li>Potentially higher returns<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">A well-designed SPC allows all of these investors to participate in the same transaction by allocating risks and rewards differently.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This is achieved through a layered capital structure.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Layer 1: Senior Debt<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">At the top of the structure sits the senior lender.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In our example, Bank of America provides the senior loan.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Senior lenders enjoy:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>First priority repayment<\/li>\n\n\n\n<li>Contractual interest payments<\/li>\n\n\n\n<li>Security interests over the underlying assets<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">As long as the property generates sufficient cash flow, the senior lender gets paid first.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Characteristics of Senior Debt<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Advantages<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">1) Lowest risk<\/p>\n\n\n\n<ol class=\"wp-block-list\"><\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">2) Highest protection<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">3) Priority claim on cash flows<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Disadvantages<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">1) Limited upside potential<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">2) Fixed return<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Senior lenders are primarily concerned with getting their money back rather than participating in future gains.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Layer 2: Preferred Units<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The next layer consists of preferred investors.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">These investors accept more risk than senior lenders but receive higher expected returns.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Preferred investors typically receive:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Fixed or target distributions<\/li>\n\n\n\n<li>Priority over common investors<\/li>\n\n\n\n<li>Better yields than senior debt<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Think of preferred investors as occupying the middle ground between debt and equity.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">They seek:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Higher returns than lenders<\/li>\n\n\n\n<li>More protection than equity holders<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Layer 3: Common Units<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Below the preferred investors sit the common unit holders.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In our example, ABC Corp. retains the common units.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Unlike lenders and preferred investors, common investors do not receive guaranteed returns.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Their performance depends entirely on the success of the transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If the property performs well, common investors benefit.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If performance deteriorates, common investors absorb losses.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As a result, common units carry significantly more risk than senior debt or preferred units.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\">3. <strong>The Most Important Piece: Residual Interest<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The residual interest is often the most interesting part of an SPC structure.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">After all obligations have been paid:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">1) Senior Debt<br>2) Preferred Investors<br>3) Common Investors<\/p>\n\n\n\n<ol start=\"1\" class=\"wp-block-list\"><\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">Any remaining cash flows belong to the residual holder.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In our example, ABC Corp. retains the residual interest.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This means ABC Corp. participates in:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Property appreciation<\/li>\n\n\n\n<li>Excess rental income<\/li>\n\n\n\n<li>Unexpected gains<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">However, ABC Corp. also bears:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Property value declines<\/li>\n\n\n\n<li>Operating underperformance<\/li>\n\n\n\n<li>Unexpected losses<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The residual holder therefore occupies the highest-risk and highest-return position within the structure.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\">4. <strong>Understanding the Cash Flow Waterfall<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">One of the most important concepts in structured finance is the <strong>cash flow waterfall<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Cash generated by the underlying property is distributed according to a predefined order.<\/p>\n\n\n\n<figure data-spectra-id=\"spectra-c09012a0-7eee-4ea5-bdd6-5a24173735d2\" class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"542\" height=\"677\" src=\"https:\/\/gaap-bridge.com\/wp-content\/uploads\/2026\/06\/spc04.png\" alt=\"\" class=\"wp-image-257\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">This simple waterfall concept explains most SPC capital structures.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\">5. <strong><span style=\"text-decoration: underline\">Why Does the Sponsor Retain Common and Residual Interests?<\/span><\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Many people wonder:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><span style=\"text-decoration: underline\">If ABC Corp. sold the property, why does it still retain common units and residual interests?<\/span><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">There are several reasons.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>1) Alignment of Interests<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">External investors want confidence that the sponsor remains committed to the success of the transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Retaining a subordinated position demonstrates that commitment.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>2) Funding Efficiency<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">When sponsors retain part of the risk, lenders and preferred investors are often willing to provide financing at more attractive rates.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>3) Participation in Future Upside<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Sponsors may still wish to benefit from future appreciation of the underlying asset.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">By retaining residual interests, they preserve some exposure to future gains.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\">6. <strong>The Real Purpose of an SPC Capital Structure<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The primary purpose of an SPC is not simply to isolate assets.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Rather, it is to redistribute economic risks and rewards among different participants.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Each investor selects the level of risk they are comfortable taking:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><th>Position<\/th><th>Risk Level<\/th><th>Expected Return<\/th><\/tr><tr><td>Senior Debt<\/td><td>Low<\/td><td>Low<\/td><\/tr><tr><td>Preferred Units<\/td><td>Medium<\/td><td>Medium<\/td><\/tr><tr><td>Common Units<\/td><td>High<\/td><td>High<\/td><\/tr><tr><td>Residual Interest<\/td><td>Highest<\/td><td>Highest<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">The SPC structure allows all of these investors to coexist within the same transaction.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\" \/>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>7. Final Thoughts<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">At first glance, SPC capital structures can appear overly complicated.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In reality, the underlying logic is straightforward.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">Different investors want different combinations of risk and return.<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">The SPC simply divides economic exposure into separate layers so that each participant can choose the level of risk they are willing to accept.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Understanding these layers is essential because they influence not only financing decisions, but also future accounting analyses involving True Sale, risks and rewards, and consolidation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Thanks for reading!<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Hello everyone, Global CPA here ?? In the previous articles, we discussed why companies establish SPCs, how True Sale is [&hellip;]<\/p>\n","protected":false},"author":276482313,"featured_media":226,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_eb_attr":"","site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center 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