Avoiding the pitfalls of title insurance in portfolio transactions
In commercial real estate financing transactions involving a portfolio of properties located in more than one state, lenders should consider certain title insurance issues specific to such transactions. Lenders will need to apply for specific types of coverage and be aware of certain timing and state-specific issues that are often associated with large portfolio transactions.
In a single real estate transaction, a lender would typically get a single loan policy for the full loan amount. In portfolio transactions, there are usually more than one mortgage that secures the full loan amount, which raises an additional set of issues. First, it is difficult to include multiple properties on the same loan policy, especially as the number of sites increases. Second, while a mortgage can secure the full loan amount in jurisdictions where there is no mortgage tax, multiple policies cannot be issued with coverage equal to the total loan amount for each property because the premium would be excessive. Third, separate and distinct policies with coverage amounts equal to the individual loan amount awarded for those assets should be self-contained, meaning that a loss on an asset greater than the amount insured for those assets would leave the lender uninsured for the loss of this surplus. While a mortgage in a non-mortgage tax state will generally secure the total loan amount that will exceed the value of the property in question, the amount of title insurance on such property will not.
The ALTA 12-06 (aggregation) rider, often referred to as the “Tie-In” rider, addresses the above concerns and is therefore a necessary rider in any portfolio transaction. The “Tiie-In” rider allows a securities company to issue separate policies for each mortgaged property with insured amounts equal to a “grossed up” portion of the total loan amount allocated to that property (typically 125%), then groups together the insured amount of this policy as well as the insured amounts of the policies listed in the endorsement “Commitment” so that the total insured amount is at least equal to the total amount of the loan. Essentially, this produces the same result as the securities company issuing a single policy covering the entire portfolio. It allows the lender to take advantage of any increase in the value of individual properties, because if there is a loss on a single property that is greater than its allocated loan amount, then the lender can take advantage of the remaining portion of the coverage. insurance to make itself whole. In addition, this type of insurance protects lenders against fluctuations in the value of individual properties in a portfolio.
However, the “Tie-In” endorsement is not available in all states. Title insurance is regulated by each state and therefore there are variations in the availability and forms of endorsements from state to state. Specifically, Florida, Delaware, and Pennsylvania will only enforce “pegging” policies for properties located within their own state. For states that will only “tie-in” interstate policies, the total amount of coverage for those properties should be increased to account for the inability to “tie-in” with the rest of the portfolio. Additionally, lenders should be aware that some states have capped liability amounts for aggregate policies. In this situation, ALTA rider 12.1-06 (aggregation – state limits) is used, which simply states that if the land is located in a restrictive state, the aggregate insured amount for that state is capped at that amount.
In addition to aggregation considerations, portfolio transactions also raise coinsurance issues, especially transactions with large loan amounts. Many banking institutions have maximum risk guidelines that require them to diversify insurance risk among multi-title companies in the event the loan amount exceeds certain thresholds. These guidelines also depend on the securities company providing the insurance. In a portfolio transaction, especially a close on a tight deadline, it is best to involve the co-insurer in the transaction as early as possible. This can be a delay element that can prevent a timely closing due to the fact that a coinsurance company may potentially need to take the time to perform their own due diligence before agreeing to coinsurance. which essentially obliges him to start at the stage of preliminary engagement of the title. Lenders who finance large loan portfolio transactions should ensure that the ALTA 23-06 (coinsurance) endorsement, also known as the “Me-Too” endorsement, is obtained and is requested early in the transaction timeline.
Lenders should also consider reinsurance to better manage the risk attributed to the creditworthiness of the title insurance company. Reinsurance is title insurance purchased by the original title company from third party title companies to cover liabilities greater than a specific dollar amount. Reinsurance can be used in the same transaction as coinsurance, thus further diversifying credit risk. When reinsurance is obtained, lenders should ensure that it is issued in a form that gives the insured “direct access” to the insurer so that coverage is not derived.
Knowing the correct title insurance coverage, state-specific nuances, and timing issues will help you move your portfolio funding forward to a smooth close, avoiding unnecessary delays and potential pitfalls. .