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Overcoming Title Roadblocks for Successful Solar Project Closings - Part I
Overcoming Title Roadblocks for Successful Solar Project Closings - Part I
by Jillian Ballard
Envision a beautiful landscape, full of reflective glossy solar panels soaking up the sun as it shines down over rolling hills. Next to that, tall and powerful wind turbines rotate over fields of wheat as far as the eye can see. The beauty and power of renewable, clean energy is all supported by the land we build it on. Land is such a vital component of a renewable energy project that, without it, our projects would not exist. But how do developers ensure that they have land rights which not only support project construction, but also enable their projects to be sold, invested in, or encumbered by financing? They need a clear title.
Title refers to the status of the ownership history of a piece of land. All problems, issues, or risk-creating situations within the history of a property are referred to as clouds in the title; just like clouds over solar panels, they may require extra energy. Clear title means that all clouds on title have been resolved. With clear title, a developer can obtain title insurance for their own leasehold or ownership interests, and for their lenders or investors’ interests. Failure to obtain title insurance for development counterparties will cause delay or termination of the transaction closing.
Why do developers need title searches?
Due to renewable energy projects spanning hundreds, or even thousands of acres, numerous landowners may be involved. Each requires their own title search. Given the rural siting of many projects, title may have informally changed hands through the same families for many years, and may never have been previously searched. Ownership may be more complicated than originally assumed, or than originally shown in the local tax records when the land agent first knocked on someone’s door to discuss development. A title search should be an integral part of the developer’s initial due diligence to ensure that all problems are uncovered as early as possible.
To begin the process, the developer typically makes a request for a full title search to a title insurance company. By requesting this, they are asking the title insurance company to search the title back at least 100 years — in some cases, back to the land grants from the United States. Less complex commercial or residential real estate transactions do not always require such a lengthy search. In some states, the title search will be done by a title searching company. In other states, the title insurance company does this work themselves. Some states require the search to be done by an attorney. Each individual tax-parcel of property the developer plans on utilizing will receive its own title search. The searches are typically priced per parcel, and may be more or less expensive depending on the complexity of the information discovered during the search. The search begins by pulling all ownership history, as well as any liens, easements, or other encumbrances which attach to, or directly effect that parcel. When the searcher has completed their work, they compile all the information, as well as copies of all documents, into a title report. That report is then reviewed by the title insurance company’s underwriter.
What is title insurance?
Title insurance is an insurance product that protects the insured party from the risk of clouds on title, or title defects, for as long as that party owns, leases, or encumbers the property. One premium is paid at the issuance of the policy. Different types of policies may be stacked together for the various interest holders to get a discount on the cost. Typically, the first step is for a commitment to be written based upon the title report submitted by the title searcher. At that time, the underwriter reviews the history shown within the title report, and makes a list of all items which may pose a possible known risk to the title of the property. The items on this list are deemed exceptions to the coverage of the insurance. The list of exceptions will be shown in Schedule BII of a title commitment, pro forma or policy, and show the items for which the title insurance company is not taking the risk of themselves — leaving the risk of those items on the shoulder of a developer, lender, or investor as the insured party. From a developer’s standpoint, this is the list of items that must be cleared, cured, or otherwise removed.
The commitment also contains a list of requirements, which will be listed in Schedule BI. These requirements are the conditions which must be met for the title insurance company to issue a policy. Typically, the requirements are documentation such as death certificates, proof of marital status, or corporate documents pertaining to landowner companies. The requirements will also make note of outstanding mortgages on the property, unpaid taxes, and other judgments or liens on the property which must be paid or satisfied, released, or subordinated for the policy to be issued. For a developer, this is a list from the title company of items that must be delivered to reach closing and receive a policy.
After reviewing a commitment — and trying to cure as many exceptions, and fulfill as many requirements as possible — the developer will need to request a combined commitment and proforma to head into closing. A combined commitment takes each individually produced commitment for each parcel or landowner, and groups them into one large commitment reflecting the entirety of the land in the project. They can be very long and cumbersome. The pro forma is a form version of exactly what the policy will look like (assuming all conditions have been met). Therefore, there are no requirements listed on a proforma, and many of the exceptions the developer has gotten removed or insured over will be marked as intentionally deleted, which notes that something was there, but will not appear on the final policy.
Pro Forma policies also bring with them the possibility of pro forma endorsements. An endorsement is an add-on to the title insurance coverage granted by the policy. The list of possible endorsements typically begins with a list curated by the American Land Title Association (ALTA), and covers additional coverage for the usual transactions encountered by title insurance carriers. There are several ALTA Endorsements that specifically pertain to renewable energy projects and closings. Title insurance companies also could draft their own endorsements for extra coverage, if needed.
Conclusion
The landmark Inflation Reduction Act (IRA) has stimulated unprecedented investment in renewable energy projects. This growth has created a tremendous strain on the various parties needed to facilitate these projects, including title searchers, title insurance companies, and surveyors. The strain has led to an elongation of timelines promised for this work, and more chances for mistakes to be overlooked. It is of utmost importance that developers take these concerns seriously, and recognize the impact they will have on the transaction closing process.
Preparation and attention to detail are critical in managing projects. The strategies presented here are the result of many years of real-world problem-solving experience, laced with more than a few unexpected consequences. By carefully reviewing all pieces of the puzzle throughout the development process, you will minimize the risk of being blindsided during closing. Preparation lays the groundwork for seamless transactions.
