COVER STORY, NOVEMBER 2007

EARLY INTERVENTION
For mixed-use projects, engaging an attorney and title insurance underwriter early on is key.
Valerie Jahn Grandin, Esq.

Despite a sobering blip in the third quarter of this year, commercial real estate developers have been relatively insulated from the dire realities that face their residential counterparts. But the fallout of the recent “credit crunch” has made financing more difficult to obtain, and both commercial real estate lenders and developers are approaching their investments with renewed caution. Considered a potentially safe bet in uncertain times, mixed-use projects are becoming increasingly attractive to developers, lenders and local governments alike throughout the Southeast’s urban areas. As city dwellers continue to seek a place to live far from record-breaking traffic, the future of these “live/work/play” projects seems secure. While popular, mixed-use projects are complex and costly, they require the early involvement of both legal counsel and another key player in the transaction: the title insurance underwriter.

Most development professionals who work on mixed-use projects recognize the need to engage a real estate lawyer early in the design and development phase. Together, legal counsel and a commercial title insurance underwriter investigate and can quickly resolve title problems that could bog down construction and hinder occupancy. These matters could include deed restrictions that may limit property development or impose strict requirements on the types of businesses that may be allowed within the project, potentially dampening the developer’s return on investment. But when an attorney has a title commitment—a promise to issue an insurance policy on the property’s title—he or she can advise engineers and designers, land use planners and governmental officials about easements, access, taxing district issues, joint venture municipal financing, design requirements and approved uses.

Clear understanding of any restrictions that could affect development rights to the property is essential for mixed-use projects in particular because they are expensive, and as a result, are more likely to wind up in costly litigation if there are any title encumbrances. Attorneys, working closely with an experienced title insurance underwriter, can work through the recorded restrictions and other title matters to determine how they may be properly amended or removed to allow the property owner to achieve the highest and best use of the real estate. Some title insurance underwriters have identified attorneys on their staff as commercial underwriters charged with responding quickly to the demands of large commercial projects. Unlike residential contracts, the typical commercial contract includes a short title review period, often as brief as five to 10 calendar days, to identify and resolve all title problems. Commercial underwriters can respond within this abbreviated timeframe to aid legal counsel in strategizing and crafting a plan to resolve these issues expediently.

While many title problems can be resolved promptly, there are situations in which litigation is the only viable option to clear up title defects. These issues typically involve going back to prior owners of the property, which can be difficult if not impossible. Oftentimes, former owners are deceased and their business entities dissolved long ago. These matters can be addressed by involving a title insurance underwriter with sound business acumen early on in the due diligence process. In many cases, the title insurance underwriter can assist legal counsel in developing a solution to avoid a lawsuit and the delay of waiting for a court’s final decision. An alternative solution to litigation can include calling on an earlier title insurer to correct matters covered under a prior title policy. 

Staying out of court is more important than ever in the aftermath of the sub-prime lending market.  Prior foreclosures can add layers of complexity to any real estate transaction. In Florida, for example, a notice of commencement can be particularly troubling to lenders and developers. This is a judgment or claim of lien filed by a contractor or subcontractor that predates the lender’s financing documents. In the event of a foreclosure, the lender could not foreclose on a property until these claims are paid first. This costs everyone time and money.

If a developer waits too long in the project’s development to address title matters, options to diminish are expensive, and risky litigation may be the only choice.  But by clearing all title matters early in the project feasibility study enables the potentially expedite the financing process. Commercial title insurance underwriters and attorneys will address any concerns lenders may have with title insurance policy language and endorsements—policy modifications that give greater coverage—to provide additional security to financiers. Using some endorsements will require loan documents be drafted in a specific way, so it is important to raise these issues with lenders early in the discussions. For example, a revolving credit endorsement may benefit owner/developers by affording them lower title insurance premiums during the course of their transaction. It also protects lenders in a deal structured so that the amount of indebtedness rises and falls during the project’s development. The loan documents must comply with stringent statutory requirements in order for this endorsement to be issued. It also is important to remember that these endorsements vary from state to state, and although one lender may have been comfortable with an endorsement in a prior deal, that same title insurance coverage may not be available in another state. Attorneys and commercial title insurance underwriters are skilled in these matters and can structure a deal to afford comparable coverage to satisfy lenders. Again, this requires the early involvement of these professionals so that loan documents are properly drafted.

Good legal counsel and commercial title underwriter can help developers expedite the contract phase, the development design and approval process. These professionals, working in tandem, may avoid the need for costly litigation so the developer can focus on the financial success of the proposed project. In a typical transaction, the attorney may serve as both counsel to the developer, as well as, the agent for the title underwriter preparing the title insurance commitment and policy. This affords the developer a skilled legal professional analyzing the status of title on the project from the design phase   through build-out and the leasing phase or subsequent sale. 

Valerie Jahn Grandin is a commercial account executive and senior underwriting counsel for the Attorneys' Title Insurance Fund, Inc.

©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.