FEATURE ARTICLE, MAY 2004

ARE YOU GETTING ALL YOU NEED FROM YOUR TITLE COMPANY?
An executive from Stewart Title Company addresses some of the current title issues facing the industry today.
Kevin Thomas

Thomas

While it may not always be top of mind, securing a title insurance commitment is an essential part of the commercial real estate closing process. For the corporate property buyer and its legal counsel, the efficiency of the title company can have an enormous impact on the bottom line of a transaction. Information is king in the closing process — and the title company is at the center of the information flow. In today’s fast-paced property market, the title company’s ability to keep the client informed of key property issues is a critical success factor in any commercial real estate closing.

Market Pressures Increase Need for Higher-Quality Title Service

In the current economic environment, service and speed-to-close are more important than ever because market conditions are creating increased velocity in the property investment sectors. Despite relatively high commercial property vacancy rates in Florida and throughout the Southeast in general, large amounts of investor dollars continue to chase investment properties.

Office vacancies in downtown Atlanta, for example, are among the nation’s highest, at 20 percent, while industrial vacancies hover at roughly 16 percent. In Orlando, meanwhile, office vacancies are at a more modest 15 percent and industrial vacancies are at nearly 12 percent, close to the current national average. Farther south, in Miami, office vacancies mirror Orlando’s at around 15 percent. But due to a decrease in sublease space, industrial vacancies have dropped to a more respectable 9.4 percent.

Overall, regional property investment continues at a healthy level, and buy-ask spreads are continuing to increase. Industrial sales have outpaced the leasing and/or sale activities for all commercial property types, despite the softness of the industrial leasing market. However, office, retail and multifamily investment properties are not far behind.

During the past year, prices have been stable-to-rising, particularly in the larger southeastern markets — from Northern Virginia through Atlanta and into major Florida cities — for nearly all investment property types. Investor interest has been very high despite the weak economy.

Atlanta’s central business district recorded building sales in excess of $880 million in 2003, surpassing the previous high for investment sales set in 2000. Investment sales should continue to be active in 2004, but with fewer transactions. Even Orlando’s office sector, with acquisitions at just $490 million in 2003, is poised for growth in 2004.

This sustained interest in commercial property investment is a direct result of the current low interest rates and therefore low-cost financing, and an available inventory of suitable buildings, particularly in the Miami market. Equally important, if not more so, is investor interest in real estate as an alternative to the stock market. With sales velocity trending upwards in many areas, corporations seeking to acquire property are pressured to move quickly to secure desirable facilities and land sites.

In addition, we are seeing an uptick in 1031 exchange and reverse exchange transactions, as property owners seek to defer capital gains taxes from property appreciation. Here again, property buyers must act quickly to meet IRS requirements and take advantage of favorable interest rates.

Another factor driving property acquisitions is that today’s weak economy puts corporations under extreme pressure to reduce costs and operate as efficiently as possible. Real estate plays an important part in the drive toward lower operating costs and increased corporate profitability. With sale-leasebacks, synthetic leases and other non-purchase structures becoming more highly scrutinized by regulatory authorities, buying property is a more appealing option for some companies. Corporations that choose to buy their properties rather than lease are naturally eager to close their real estate transactions as soon as possible while interest rates remain at record lows.

For companies seeking to execute complex, multi-site transactions, these market pressures, combined with the inherent complexity of commercial property transactions, present real challenges in the closing process. These transactions may involve multiple lenders, law firms and other ancillary parties that must work together in order for transactions to close. Coordinating multiple closings simultaneously is a process that demands the constant flow of information, and the title company is at the center.

Title Companies Must Communicate — and Close

Obviously, commercial transactions are much more complex than residential transactions, being more likely to involve complicated ownership and financing structures. For the title company, the challenge is to resolve outstanding title issues in a timely manner in order to expedite closing — and to keep the corporate client and its legal counsel informed.

Corporate clients and their legal counsel naturally place a high value on the title company’s ability to solve last-minute title issues and close transactions within a defined timeframe. In our experience, however, we’ve found corporate property buyers also value the title provider’s ability to communicate what is happening with the transaction. After placing a title order — or multiple orders for a multi-site transaction — the corporate client needs to know where things stand.

Have all outstanding liens been cleared? Have all endorsements been discussed with or approved by the title underwriter? Have all encroachments been dealt with appropriately? Has anything arisen in the title search that may prevent the transaction from closing? What is the pricing of the title insurance and endorsements? Have we received all the necessary documentation?

Corporate property acquirers and their counsel should assess whether their title providers are equipped to provide a steady flow of transaction updates. If multiple sites are involved, which person at the title company will provide status information? Will the corporate client need to contact a different title office for each property location or can one title office and one or two title contacts provide status for all properties? Are title underwriting decisions made locally or must the local title office(s) obtain transaction approval from the distant headquarters of the title company?

In our company’s experience, we have found that real estate attorneys representing corporate clients typically prefer convenience and do not want to have to call multiple title offices and contacts to obtain a status report. We believe that this is a reasonable expectation. No matter how many transactions are underway, the corporate client ought to expect to obtain a single report on all transactions from one title company contact office.

In short, the delivery of high-quality title insurance involves more than legal skills — and corporate property buyers should and do expect more. Today’s corporate clients are not satisfied with the long silence that often follows the placement of a title order. The commercial property marketplace has become too complex for companies to simply sit back and wait for the title commitment to magically appear shortly before closing. With significant dollars, jobs and stakeholder expectations on the line, title companies must step up and deliver not only the title commitment, but the service and communication commitments as well.

Kevin Thomas serves as Florida underwriting counsel with Stewart Title Guaranty Company in Orlando, Florida.


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