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Finally, some good news for mezzanine loan lenders.

As the finance markets continue to thaw, attention will no doubt turn to tried and true lending structures.

This article will discuss recent developments in the form of title insurance available to mezzanine loan lenders for New York transactions.

These developments will be welcome news to those that borrow or lend on real property in New York as the form of coverage has become more flexible and less expensive.

The mezzanine lender is often referred to as a junior lender in terms of lien status. In fact, the mezzanine lender does not hold realty as security for its loan; that is the domain of the mortgage lender (the senior lender). The mortgage lender has a direct collateral interest in the property which is the subject of the financing and the mortgage, when recorded, perfects this pledge of collateral. The mezzanine lender has a direct collateral interest in equity interests (direct or indirect) in the property owning entity which is the mortgage borrower.

However, the mezzanine lender is generally not underwriting its loan based on the balance sheet of its borrower; rather, it underwrites, among other factors, based on its evaluation of the net equity value of the property, after considering the impact of the mortgage lien and any other liens or claims against the property. This is where the interests of the mezzanine lender intersect with the need for title insurance.

It is standard underwriting procedure for a mortgage lender to require title insurance as a condition of its lending. In New York, the form of policy insuring mortgage lenders is the ALTA Loan Policy (6/17/06) with Standard New York Endorsement. As noted above, the mezzanine lender is largely looking to the value of the real property owned by the entity whose equity has been pledged as its mezzanine loan collateral. Hence, the mezzanine lender, too, has an interest in requiring title insurance as a condition of its lending.

Since the mezzanine lender is a (direct or indirect) pledgee of the equity in the mortgage borrower, the title insurance available to mezzanine lenders is via an endorsement to the owner's policy (the owner is the mortgage borrower and if the mezzanine lender were to exercise its remedies and succeed to the ownership interest in its collateral under its equity pledge, it would become the owner/mortgage borrower).

In New York, the mezzanine lender would require that a TIRSA Mezzanine Financing Endorsement be issued in connection with the owner's policy. Until relatively recently, that endorsement was priced at thirty percent (30%) of the owner's policy rate and that premium was based on the full value of the property, not the amount of the mezzanine loan, which would be much lower.

A revised form of Mezzanine Endorsement was approved for use by the NYS Insurance Department, effective as of August 15, 2009. Notably, the charge for this endorsement is now twenty percent (20%) of the owner's policy rate, based on the amount of the mezzanine loan (as noted above, representing a substantial reduction from the charge of 30% of the owner's rate based on the value of the property as insured by the owner in its policy (a substantially higher sum)).

The mezzanine loan endorsement has been revised to follow the form more typically utilized nationally. However, the substantive provisions remain essentially the same. The endorsement has three (3) principal features. First (the "Assignment of Proceeds feature"), the endorsement provides for the assignment of the policy proceeds; that is, sums otherwise payable to the owner in respect of claims under the policy will instead be paid to the mezzanine lender, capped at the amount of the mezzanine loan.

Second (the "Non Imputation feature"), the endorsement provides that matters within the knowledge of the insured owner (the mortgagor), which are otherwise the subject of an exclusion from coverage under the owners policy, will not be imputed to the mezzanine lender--only the knowledge of the mezzanine lender, as defined in the policy, will be the subject of such policy exclusion. Third (the "Fairway feature"), the endorsement provides that coverage will not be denied on account of the transfer of direct or indirect ownership interests to the mezzanine lender (i.e., if the mezzanine lender succeeds to the ownership position following the exercise of its remedies). Notably, the Fairway feature is essentially rendered moot by the expanded definition of Insured in the 2006 policy forms now in use in New York State. Nevertheless, the comforting language remains in the endorsement.

In connection with the adoption of the new form of mezzanine endorsement, the guidelines for issuance of the endorsement were modified to provide an additional option for insureds. The mezzanine endorsement may now be issued in connection with a previously issued owner's policy. Thus, to the extent that the mezzanine lender is amenable to accepting a policy with an effective date prior to the making of its loan (and with the attendant gap risk for matters arising in the interim), that option is available and the cost would be for the endorsement only, as the policy would have been previously issued and paid for.

Also, as noted above, the endorsement is now issued in the amount of the mezzanine loan, and not the value of the property, which, together with the rate reduction, makes the ultimate cost of the endorsement dramatically lower than previously.

The additional flexibility and reduced pricing in respect of the issuance of the mezzanine endorsement will presumably be of interest to real property owners and lenders as the market resumes for the making of such loans.

BY ELLIOT L. HURWITZ, CHIEF COMMERCIAL COUNSEL, CHICAGO TITLE INSURANCE COMPANY
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Comment:Finally, some good news for mezzanine loan lenders.
Author:Hurwitz, Elliot L.
Publication:Real Estate Weekly
Geographic Code:1U2NY
Date:Dec 2, 2009
Words:938
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