The UCCPlus Mezzanine Endorsement: Comparison to a Real Property Mezzanine Endorsement

Mezzanine financing is used when additional monies (above the amount of financing available from the mortgage lender) are needed to acquire, construct or refinance a commercial piece of real property. Because of loan-to-value restrictions by mortgage lenders (currently, sixty to sixty-five percent loan to value is typical) the owner/developer needs to provide funds in the form of an equity contribution or obtain mezzanine financing. Mezzanine financing is a loan secured by a pledge by the mezzanine borrower of the equity in the real property owner (“Landowner”).

The mezzanine lender will not have a security interest by means of a mortgage on the land. Any real estate title insurance policy being issued provides coverage only with respect to the real property but provides no coverage with respect to the equity interest pledged by the mezzanine borrower to the mezzanine lender (the “Equity Pledge”).

The mezzanine lender protects its security interest in the Equity Pledge with title insurance in two ways. First, the mezzanine lender will obtain a UCCPlus Policy of title insurance to insure the proper Attachment, Perfection and Priority (as defined in Article 9 of the Uniform Commercial Code) of the mezzanine lender’s security interest in the Equity Pledge. Second, the mezzanine lender will require a UCCPlus Mezzanine Endorsement to the UCCPlus Policy (“UCCPlus Mezzanine Endorsement”). The UCCPlus Mezzanine Endorsement waives certain exceptions in the UCCPlus Policy, namely, those exceptions for: (i) any liens or security interests of any prior owners of the Landowner; (ii) any prior holders of the equity interest in the Landowner; and (iii) the existence of any anti-assignment statutes which would affect the enforceability of the Equity Pledge.

There is sometimes confusion between the UCCPlus Mezzanine Endorsement and a real estate title mezzanine endorsement (“Real Estate Mezzanine Endorsement” that attaches to the Landowner real estate owners policy (the “Owners Policy”). The Real Estate Mezzanine Endorsement: (i) makes the mezzanine lender an assignee of payments under the Owner’s Policy, not to exceed the debt owed to the mezzanine lender (but does not name the mezzanine lender as an additional insured); (ii) provides non-imputation coverage to the mezzanine lender for any knowledge that the mezzanine borrower or other equity holder might have with regard to the Landowner; (iii) includes “Fairway” coverage acknowledging that coverage will not be adversely affected because of transfer of ownership interests (direct or indirect) in the Insured Landowner; (iv) expressly retains a right to interplead; and (v) reserves the title insurer’s subordinate rights of subrogation and indemnity after the mezzanine lender has recovered its indebtedness. The Real Estate Mezzanine Endorsement requires the consent of the insured under the Owner’s Policy, since it affects payments to the Insured.

The Real Estate Mezzanine Endorsement and the UCCPlus Mezzanine Endorsement do not have any direct relationship to one another in terms of coverage.

One of the most common misconceptions is that if the UCCPlus Mezzanine Endorsement is being issued that the Real Estate Mezzanine Endorsement would not be necessary and vice-versa. Again, the coverages contained in each of these endorsements are separate and distinct from each other and only apply to the coverage provided by the respective policies to which they are attached.

Wise counsel will advise their client to obtain both the UCCPlus Mezzanine Endorsement and the Real Estate Mezzanine Endorsement in order to obtain the proper and necessary coverage for their client.

About the Author

Gary M. Zimmerman is Senior Vice President and Chief Underwriting Counsel for UCCPlus, a division of Fidelity National Title Group.