Ground rents - Safe as houses!!?
31 March 2011
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 which 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.
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. The proposal to use title insurance in place of traditional due diligence can also be used to offer the seller a shorter timescale to complete the transaction. In these circumstances, after completion of underwriting, First Title can provide a commitment to insure upon payment of a small fee which is deducted from the final premium.
Case study: Refinancing of a portfolio of ground rents (Private UK property investor)
The Development
Refinancing of the portfolio following acquisition of the former owning company. New loan finance to be insured.
The problems
The size of the portfolio (over 10,000 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 a 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.
The structure
Policy wording incorporating the funder's requirements was negotiated and issued within the refinancing timescale.