Title Insurance For Real Estate Mezzanine Financing: UCC Policy Requirements and Coverage

Description

Because mezzanine financing is typically secured by a pledge of the borrower's equity in the entity owning the real property, rather than a mortgage in the property itself, traditional real estate title insurance is not sufficient for mezzanine loans. Mezzanine lenders may obtain title insurance: the UCC Insurance Policy.

Confusion exists regarding the mezzanine loan endorsement attached to the owner's title insurance policy and the UCC insurance policy that the mezzanine lender obtains. Counsel must know the reasons for each, how the coverages differ, and the closing requirements for each.

The mezzanine financing endorsement is intended for use when the mezzanine lender takes a pledge of the equity interest in the title-holding entity. Under the owner's policy, the owner and insured assign their rights to any amounts payable under the policy up to the amount of the mezzanine loan. The endorsement further provides the mezzanine lender with non-imputation coverage and direct access to claim proceeds under the owner's policy.

A UCC lender's insurance policy (which runs to the mezzanine lender as the insured) insures that the mezzanine lender has proper attachment, perfection, and priority of its security interest in its collateral under Articles 8 or 9 of the UCC. Without proper attachment, perfection, and priority, the insured mezz lender may not have a properly perfected security interest and may not be able to pursue all of its "foreclosure" remedies under the UCC. The mezzanine financing endorsement to the owner's policy covers none of this.

Most mezzanine transactions include opting into Article 8 of the UCC and having the equity interest certificated, turning a "general intangible" under Article 9 of the UCC into a "security" under Article 8. The UCC lender's policy can be used whether the collateral is an Article 8 security or an Article 9 general intangible. A UCC lender's policy can also be amended to reflect any loan modifications, including an increased loan amount. Perfection under the UCC remains in place, but the certificate and related power must be located if a new lender is involved in the refinancing.

Listen as our authoritative panel discusses the mechanics of obtaining a UCC title insurance policy and the coverage it provides, the differences between a mezzanine financing endorsement and a UCC policy, opting into Article 8, and taking physical possession of the certificate at closing to "trump" others claiming an equity interest and dealing with a lost certificate in the context of a refinance.