5.12 Equity Participation

5.12.1

In General

An equity participation is a financial arrangement in which a lender has the right to share in the gross profit, net profits, or cash derived from property on which the lender has made a loan.

An equity participation may assume different forms. There are several variations to this type of participation financing, but the most common are the following:

  • Splitting the Ownership

    • Corporation--The lender acquires stock in a corporate developer.

    • Partnership--The lender becomes a partner in a partnership that holds the title.

    • Joint Venture--The lender becomes a member of a joint venture that holds the title.

  • Participation Agreement

    • Participation in gain on any resale within a designated period; or

    • Option to purchase an interest in the developer's real estate, stock, or partnership.

5.12.2

Title Insurance Considerations

 

 

Corporation Ownership Participation
If the lender owns stock in a corporation (the corporate developer), there is generally no problem in insuring title in or a mortgage from the corporation, unless the corporation is a single purpose (one asset) corporation, the lender has controlling interest in the corporation, and the corporation is undercapitalized. If these features appear, please call the National Legal Department.In 2009, the Texas Insurance Commissioner approved agenda items 2008-21amd 2008-60 creating and pricing a Mezzanine financing endorsement.

Partnership or Joint Venture Ownership Participation
On the assumption of full compliance with the local statutory provisions pertaining to the holding of real estate by partnerships and joint ventures, there is generally no problem in issuing an owner’s title insurance policy in favor of the partnership or joint venture.

However, when a partnership borrows money from one of the general partners and gives that partner a mortgage on partnership land, it seems that if such a mortgage remains unpaid when the partnership becomes insolvent, the general creditors of the partnership will enjoy priority over the mortgage and will have to be paid in full before anything is paid to the mortgagee. It is a well-established doctrine that a general partner has unlimited liability for partnership debts. The joint venture, being a form of special partnership, makes a joint venturer equally liable for the joint venture debts.

Consequently, any commitment for a loan policy and the mortgagee’s policy or itself must contain an appropriate exception.

Related Matters
Similar problems are involved in joint ventures options to purchase, sale and leaseback.  

In 2009, the Texas Insurance Commissioner approved agenda items 2008-21amd 2008-60 creating and pricing a Mezzanine financing endorsement.The order created form T-24.1 Non-Imputation Endorsement (Mezzanine Financing) to allow non-imputation coverage to the Financing Lender be provided in the Owner's Policy.

  • Both the Insured and the Mezzanine lender must sign the Endorsement.

What you need to do: Mezzanine Financing occurs when the lender in a commercial transaction takes an equity position in a project in return for making loan concessions. Title Agents will need to follow basic non-imputation procedures to assure that new investors in or owners of the titleholder do not have knowledge of matters that were known or created by prior owners unless such matters are  excepted in Schedule B of the Owner Policy.2008-60:Sets the rate for the T-24.1 at 5% of the premium which an Owner’s Policy of the same amount as the loan policy would bear with a minimum premium of $25.00.