(953) Comm product focus - Investors ground rent

Product Focus: Investors - ground rent Background For many mainstream property investors, residential ground rents are a largely unknown asset class.

However, against the backdrop of tough economic and property market conditions over the last few years they have provided the secure income and low-risk profile that many property investors strive for. Investors are attracted not only by the rental income and capital appreciation but also by the ancillary income which can be generated via the provisions of the lease.

For example, premiums can be generated for lease extensions and income generated from the arrangement of buildings insurance cover for the lessees. The relatively low rents payable on each individual unit means a substantial portfolio is required to maximise all investment benefits.

Typically an investor and their lawyer could be faced with having to conduct full due diligence against the title to hundreds or even thousands of properties only for this to have to be repeated if the portfolio is either refinanced or sold at some point in the future.

Undertaking such an exercise can be time consuming, costly and, if due diligence is conducted on only a sample basis, leave the investor with an uninsured title claim.

Major benefits for any larger scale ground rent investor are the economies of scale that can be generated from large portfolios.

The use of title insurance provided by First Title can replace or reduce the need to conduct traditional due diligence and carry out the usual conveyancing searches, also giving peace of mind that every property in the portfolio is insured. Policies can be provided to benefit both the investor and their lender, or just the latter if a refinance is taking place. A one off premium is charged for cover that is significantly cheaper than the cost of traditional due diligence, and the underwriting can usually be completed in a matter of days.

Additionally, if you are a fund investing in ground rents, then our policies cover your fiduciary obligation to the investor to ensure that the titles to the underlying assets are of good quality and the policy continues to cover the fund against any title warranties they give on disposal, enabling a quicker distribution of funds to the investors, and shorter timescale to completion. The use of our policies may also help you to distinguish your bid in a competitive auction for a portfolio by negotiating more limited recourse from the sellers by supplementing the contractual recourse with insurance.

Development • Refinancing of a portfolio of ground rents. • Private UK property investor.

Refinancing of the portfolio following acquisition of the former owning company new loan finance of ÂŁ52m was to be insured.

Cont/d 953-0219

The Problems The size of the portfolio (15,000 titles) made conventional due diligence impractical in terms of time and cost. Initial examination by the client and by First Title showed that the property records required substantial work to make them fit within the client’s operating system and, more importantly, that a substantial proportion were not registered in the correct name of one of the owning entities. Corrective work would be done, but the time required to complete this would seriously delay draw-down of new financing.

In addition, the standard First Title policy documentation did not address all of the issues raised by the new funder.

The Underwriting Because of the history of previous transactions with the same investor, First Title was able quickly to assess how well the registration problem would be tackled. Having assessed the robustness of the client’s processes, First Title then carried out samples on the title records to identify the extent of the registration problem.

A timescale for completing registrations after draw-down was proposed, and a system of checking volume milestones agreed. The nature of the policy amendments required by the funder was examined to ensure that the final version delivered the necessary cover while allowing First Title to remain within its own reinsurance conditions.

Solution Policy wording incorporating the funder’s requirements was negotiated and issued within the refinancing timescale.

For further information on how First Title can assist you with its range of specialist cover and policies, please contact directly using the details below.

This material is intended to be general information only, for specific coverages and exclusions please refer to the policy document and seek independent legal advice.

Call: +44 (0)207 160 8100 Email: info@firsttitle.co.uk Visit: www.firsttitle.co.uk First Title Insurance plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. First Title Insurance plc is registered in England under company number 01112603. Registered office: First Title Insurance plc, ECA Court, 24-26 South Park, Sevenoaks, Kent TN13 1DU.

Leading Title Insurance