United States: Resolving Previous Mortgage Issues for New Renewable Energy Projects
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A pre-mortgage is a typical due diligence element in the real estate title verification process for renewable energy projects. Resolving issues related to previous mortgages is key to creating a title policy that satisfies lenders and investors, as well as protecting the project company’s real estate assets. The following serves as an introduction to previous mortgages and mechanisms for their resolution, but each project is unique, so the further path will necessarily vary from project to project. While the process can be tricky, there are several key strategies that can keep the title fixing and development process on track.
What is a pre-mortgage?
Previous mortgages are displayed in the title deed of the real estate under the obligation or in the pro forma provided by the title company in preparation for closure. As with a typical real estate transaction involving financing, lenders and investors will require title insurance as a condition of a loan or project investment. A title commitment is a commitment to release the policy in this form, and a pro forma is a draft of the final policy that will be issued at closure. Both must be examined in detail for potential defects that require correction, also known as “curatives”. The pre-mortgage is the first priority of the treatment.
It is not unusual for a landowner to have an existing mortgage on the property that will be part of a renewable energy project site. Since the mortgage is granted prior to the lease or easement of the project company, it takes precedence in the event of foreclosure due to default by the landowner. This means that if the landowner fails to pay his mortgage on time or otherwise fails to meet his obligations, the landowner’s lender could take over or forcibly sell the mortgaged property, potentially depriving the project company of its title to the leased land. or easement. Mortgages often have language that limits the landowner’s ability to build structures on the land or lease out properties without the prior consent of the lender.
How can previous mortgage problems be resolved?
- Equanimity agreement
A non-destructive agreement (NDA) is exactly what it sounds like – an agreement not to violate property rights when certain conditions are met. These types of agreements can be stand-alone or in combination with subordination, which is described in more detail below. The form of the agreement must be agreed to the satisfaction of both parties, but, in essence, the NDA will need to establish that the lender agrees to recognize the project company as the lessee or the holder of the easement under the lease or easement of the project company, and that the project company agrees to recognize the lender as the new owner. property in the event of foreclosure.
In a subordination agreement, the landowner’s lender agrees to subordinate his lien to the lease or easement clause of the project company. This means that even if the lender waives their mortgage, the project company’s lease rights will outweigh the mortgage. In this case, the lender cannot exclude the interest of the project company in the property or forcibly remove the project objects. As mentioned above, subordination agreements usually also include worry-free language similar to those used in NDAs.
The third option is to ask the landowner’s lender to vacate some of the land that will be part of the project from the previous mortgage. At this stage, the project land is no longer a mortgage collateral, the landowner’s lender is not eligible to repurchase the land, and the project company may require the title company to remove the previous mortgage as an exception to the title works. This works well when only a portion of the land under the previous mortgage is expected to be part of the project, so that if the lender vacates the land for the project, there will still be sufficient land as collateral for the mortgage.
While dealing with previous mortgage problems can be cumbersome, there are several key strategies that can help attract a lender. First, get the landowner involved in the process as early as possible, because negotiating with the lender can take time. Explain to the landowner what you are trying to achieve by settling a previous mortgage and why it is important, and ask the landowner to pass this information on to your lender. Landowners can have a positive relationship with their lenders, especially if the loan is from a small bank in a small town where everyone knows everyone. Don’t discount the value of this relationship. In addition, the lease or easement of the project company may require the assistance of the landowner, usually at no cost to the landowner.
Once you have obtained the lender’s contact information, reach out to them and explain what the project is and why it is important to the landowner and possibly the entire community. Explain that the parties to the funding will need one of the three options listed above, and that such funding is needed to develop the project. Tell the lender that the project company is willing to partner with them and ask the lender what they will need from the project company to move forward. You can also indicate that the landowner’s financial position can only improve if the land generates more income.
The content of this article is intended to provide general guidance on the subject. You should seek professional advice regarding your specific circumstances.
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