Stewart Information Services Corporation · NYSE:STC
Stewart Information Services — Title Tenets Webinar Series (November 2022)
27 slides from Stewart Information Services's conference presentation, Nov 11, 2022
Slide 1: UCC Mezzanine Loan Policies
UCC Mezzanine Loan Policies Title Tenets Webinar Series Presented By: Troy Denunzio – UCC Operations Manager & Jeremy Poetker – Sr. Underwriting Counsel Friday, November 11, 2022
Slide 2: What we will cover today
What we will cover today Help you better understand the risks and protections needed on mezzanine loans, as well as provide detailed answers to questions such as: • what is mezzanine financing • why are mezzanine loans becoming more common • what’s the difference between a traditional real estate lo
Slide 3: What is Mezzanine Financing
What is Mezzanine Financing A Mezzanine Loan is an equity loan secured by pledges of the ownership interests in the titleholder. Focus is on equity collateral -- a general intangible or a certificated or uncertificated security that is taken as collateral in a mezzanine finance transaction. The Mezz
Slide 4: What is Mezzanine Financing
What is Mezzanine Financing • Generally a grant of security interest or pledge by the debtor of its interest in the property-owning entity (the “issuer”) which is most commonly a limited liability company or limited partnership. The property-owning entity is commonly referred to as the Issuer. • The
Slide 5: History and Origin of UCC Title Insurance
History and Origin of UCC Title Insurance • Introduction of real estate mezzanine financing 20 years ago • Desire for mezzanine lenders to securitize their mezzanine loans • A new opportunity for title insurance companies to expand their portfolio of offerings • Many of the large title insurance com
Slide 6: Post-Closing Structure
Post-Closing Structure ABC Real ABC Real ABC Real ABC Real ABC Real ABC Real ABC Real ABC Real ABC Family ABC Real ABC Real ABC Real Estate Estate Estate Estate Estate Estate Estate Estate Real Estate Estate Estate Estate Partners Partners Partners Partners Partners Partners Partners Holdings Partne
Slide 7: Moody's Recommendations to Rating Commercial Real Estate Mezzanine Loans
Moody’s Recommendations to Rating Commercial Real Estate Mezzanine Loans • Pledge of 100% of the beneficial ownership interests of the issuer • Borrower will irrevocably opt-in to Article 8 • Perfection by certificating the membership interests • File a financing statement • Organizational documents
Slide 8: Benefits of Mezzanine Financing for Buyers
Benefits of Mezzanine Financing for Buyers In commercial real estate, the primary source of financing is often limited to no more than 60% of the value of the property. The potential buyer must obtain additional financing if they are unable or unwilling to put up the rest of the funding to complete
Slide 9: Benefits of Mezzanine Financing for Investors
Benefits of Mezzanine Financing for Investors This sort of investment is an inherently risky position. But with great risk can come great reward, so investors are often willing to put up mezzanine financing for real estate transactions. Investors can expect high interest rates, well above the prime
Slide 10: Comparison – Article 9 Security vs Mortgage Loan
Comparison – Article 9 Security vs Mortgage Loan Regular Mortgage Loan: • Collateral is real property • Promissory Note, Mortgage • Mortgage is recorded in real property records Mezzanine Loan secured via Article 9: • Collateral is personal property • Promissory Note, Pledge and Security Agreement •
Slide 11: Article 9 Perfection Problems
Article 9 Perfection Problems Searching and filing is complex and detailed: • Search logic varies from state to state • Errors and omissions via secretary of state and search vendors • Indexing inconsistencies • Human error, typographical mistakes can result in perfection failure NYSE: STC : The inf
Slide 12: Article 8 and Certificated Securities
Article 8 and Certificated Securities • An equity interest can be represented by a certificated “security”, where the issuer has opted in to Article 8. • Such a certificate, in possession of the secured party, trumps a secured party under Article 9. • Mezzanine Lenders typically opt to be secured bo
Slide 13: Perfection With Respect to an Equity Pledge: Opting-In, Opting-Out
Perfection With Respect to an Equity Pledge: Opting-In, Opting-Out How does one opt-in to Article 8: • In the organic document that controls the entity whose equity interest is being pledged • Only in the Limited Liability Company Agreement, Limited Partnership Agreement • Not the pledge agreement o
Slide 14: Perfection With Respect to an Equity Pledge: Opting-In, Opting-Out
Perfection With Respect to an Equity Pledge: Opting-In, Opting-Out Sample opt-in language: Each limited liability company interest in the Company shall constitute and shall remain a "security" within the meaning of (i) Section 8-102(a)(15) of the Uniform Commercial Code as in effect from time to tim
Slide 15: Perfection With Respect to an Equity Pledge: Opting-In, Opting-Out
Perfection With Respect to an Equity Pledge: Opting-In, Opting-Out • The ultimate goal of the mezzanine lender: Be a Protected Purchaser Under Article 8 • Definition of a protected purchaser: 1. Gives value 2. Does not have notice of any adverse claims to the security 3. Obtains control of the secur
Slide 16: Post Mezzanine Loan Closing Perfection Problems
Post Mezzanine Loan Closing Perfection Problems • Downside to perfection by filing: After mezzanine loan closes, issuer “opts-in” and tenders a certificate and power to a second lender who becomes a protected purchaser • Downside to perfection by possession of certificate and power under Article 8:
Slide 17: UCC Policy
UCC Policy 1. Stewart’s UCC Lender’s Policy insures and indemnifies the lender’s attachment, perfection and first priority security interest in personal property taken by the lender as collateral for a loan 2. The functional equivalent to a real estate lenders title insurance lender’s policy 3. Insu
Slide 18: Major Benefits in Obtaining a UCC Title Insurance Policy
Major Benefits in Obtaining a UCC Title Insurance Policy What could go wrong? 1. Not getting the debtor’s exact legal name correct 2. Not conducting a proper UCC search 3. Not utilizing proper search logic 4. Not filling out the financing statement correctly 5. Not filing the financing statement at
Slide 19: Insured Collateral
Insured Collateral • 100% of the parent’s membership interest in the titleholder • General Intangible under Article 9 • Perfected by filing a UCC-1 in the debtor’s state of formation NYSE: STC : The information provided in this presentation is for general informational purposes only, should not be s
Slide 20: Financing Documentation
Financing Documentation • Mezzanine Loan Agreement • Mezzanine Promissory Note • Mezzanine Pledge and Security Agreement • UCC-1 Financing Statement NYSE: STC : The information provided in this presentation is for general informational purposes only, should not be solely relied upon, and is subject
Slide 21: UCC-1 Financing Statement
UCC-1 Financing Statement • Debtor’s name must match organizational documents • Description of collateral must match pledge agreement NYSE: STC : The information provided in this presentation is for general informational purposes only, should not be solely relied upon, and is subject to change witho
Slide 22: Underwriting Requirements
Underwriting Requirements • Organizational/transaction chart • Mezzanine Pledge and Security Agreement • Certificate of Formation • Mezzanine Promissory Note • Operating Agreement with all amendments (Art. 8 opt-in) • Mezzanine Loan Agreement • Consent of Members authorizing • Delivery and indorseme
Slide 23: Additional Options
Additional Options Mezzanine Endorsement Modifies Article 8 Exclusion for Coverage Always request when secured interests are certificated Tracking Letter Stewart will alert you prior to lapse of UCC-1 filing Co-insurance Endorsement UCC policies can be co-insured among multiple companies NYSE: STC :
Slide 24: Mezzanine Endorsement to Owner's Policy
Mezzanine Endorsement to Owner’s Policy (1) Assignment of payments under the Owner's Policy not to exceed the debt owed to the Mezzanine Lender (2) Non-Imputation coverage to the Mezzanine Lender (3) "Fairway" coverage, acknowledging that coverage will not be adversely affected because of transfer o
Slide 25: Requirements
Requirements • Stewart Mezzanine Affidavit • Financial disclosures • Consent of the insured by signature on the endorsement or by separate letter • Name the Mezzanine Lender in paragraph 1 of the Endorsement • Secure the signature of the Mezzanine Lender on the Endorsement NYSE: STC : The informatio
Slide 26: Mezzanine Foreclosure vs Standard Foreclosure
Mezzanine Foreclosure vs Standard Foreclosure • A mezzanine loan is secured by a pledge of the equity of the entity (such as a limited liability company) that owns the mortgaged real estate. If the mezzanine borrower defaults, the mezzanine lender forecloses and becomes the new owner of the pledged
Slide 27: Thank you
Stewart NCS Stewart NCS UCC/One UCC/One Troy Denunzio Jeremy Poetker UCC Operations Manager Jeremy.poetker@stewart.com Two Grand Central Tower 140 East 45th Street, 33rd Floor New York, NY 10017 646-787-2505 direct Thank you 203-212-4079 cell troy.denunzo@stewart.com stewart.com/commercial NYSE: STC
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