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FEATURE ARTICLE, APRIL 2008
COMMERCIAL TITLE INSURANCE 101
Five pitfalls to avoid when conducting the title insurance process.
David Feldman
There’s good reason why working with the right title insurance company is a necessity in all commercial real estate transactions: According to The American Land Title Association, 25 percent of title searches reveal a serious issue — liens, title defects, contested ownership, and fraud — that must be corrected before closing.
In the rare event such problems are missed, the title company is on the hook to defend against lawsuits attacking the title, or reimburse buyers for losses up to the face value of the insurance provided by the title policy.
In a world where commercial real estate transactions continue to grow in size and complexity, it’s important — whether you are new to the real estate industry or a seasoned veteran — to be aware of all the moving parts involved in closing a commercial real estate transaction or risk costly hold ups.
Here are five important pitfalls that real estate professionals and buyers should avoid when going through the title insurance process during a commercial real estate transaction:
1. Waiting Until the Last Minute to Engage a Title Company
Surprisingly, title insurance timing is a commonly overlooked aspect in commercial real estate transactions. Buyers often don’t start thinking about title insurance until a closing date is looming. But given the complexity of large commercial deals, it’s best to engage a title company as soon as a transaction is even a possibility — even if the details haven’t been fully ironed out.
The title company will quickly conduct a title search, which will shed light on whether or not the seller has a saleable interest in the property; if any liens exist on the property that need to be paid off at the time of closing, such as mortgages, back taxes, mechanic’s liens, or other assessments; and if there are any easements, or recorded legal rights, to the property or portions of the property. For example, a previous owner may have legally given a neighbor the right to share the driveway, or the city may have a right to strip the property for installing power lines, communication lines, water pipes, or sewer pipes. All of these issues can tie up a commercial real estate deal.
2. Working with a ‘B’ Team on an ‘A’ Transaction
Commercial real estate transactions are complex and require a strong team to make them happen. One of the most important team members is your title company.
All title companies are not created equal. Certain firms are better equipped to handle large commercial transactions than others. For most commercial transactions, you are better off working directly with an in-house title underwriter. This is because in-house underwriters have significant resources at their fingertips that private agents don’t, such as legal counsel on staff, professional closers, and accessibility to cutting edge technology. A highly experienced team with deep breadth and resources is more likely to find and address issues proactively before they become deal breakers.
But how can you tell? Some important questions you can ask to screen potential insurers include:
• Who within the title company will be handling the transaction?
• Is the company a full-service operation, fully staffed with professionals capable of performing the many aspects of transactions?
• Who will underwrite the project?
• Who will make the overarching decisions?
• Is there a legal counsel on staff with experience with commercial real estate complexities?
• Is there a title expert?
3. Title Companies Using Technology from 1998 in 2008
Commercial transactions are often high-pressure, time-sensitive deals. Data and documents must be available on demand, especially when its time to put pen to paper. Yet many title companies lack digital document management technology that can mean the difference between a deal that breezes through closing and one that falls apart at the table.
Web-based tools give buyers and sellers everything they need at the push of a button. These tools make it point-and-click easy for underwriters and their clients to handle every phase of the transaction, from opening a title order, to putting the title commitment in the system, to conducting title searches, to storing and organizing title documents.
If your title company does not have the infrastructure in place to quickly and securely call up, review, annotate, update, and distribute title documents — a critical element during a race-to-the-finish commercial closing — the entire process will be slowed and a deal could be lost.
4. Underestimating the Complexity of a Multi-site,
Multi-Jurisdictional Transaction
With a multi-site or multi-state transaction, it’s crucial to work with a title company that can provide national coverage and a single point of contact. Laws, regulations, taxes, terminology and practices vary across jurisdictions.
Title agents, whose bread and butter are not commercial transactions of this size and scope, can have a very difficult time managing such transactions. This, in turn, can lead to delays in closing, or even blow an entire deal.
5. Falling Down on Preparedness
Like most other things in life, having all the tools you need to be prepared for closing a commercial real estate transaction is imperative. Be sure you have a pay-off letter from a lender if necessary, sufficient funds and wire instructions in hand. If these items are forgotten or not ready, they can derail a closing — wasting time, energy and money.
While being prepared is a seemingly obvious concept, it is a very important one. And again, working with the right title company that routinely closes large, intricate commercial real estate deals will ensure that you have all your ducks in a row.
David Feldman is senior vice president and regional director of First America Title Insurance Company, National Commercial Services Division, in Philadelphia, which specializes in underwriting and insuring large commercial transactions.
©2008 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.
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