Generating an estimated $1.5 trillion a year, accounting for almost 10 million jobs and providing 10 percent or more of the economic output of 20 states, the franchising industry is proving to be a lucrative market for a growing number of the nation’s 760,000 franchise owners.
While owners of a single franchise make a sustainable living, franchisees who can parlay one store into a string of them are becoming millionaires.
Savvy multi-unit franchise owners know that advanced planning on the front end can save time and money down the road as they consider avenues for expansion. For the typical franchise owner, time is of the essence during the refinancing phase, and concerns about how much money can be secured through the lender and how quickly the deal can be completed are major concerns.
One way to reduce costs and cut down on closing time is to provide the lender as soon as possible with the title file for each property currently owned. The franchisee’s real estate portfolio serves as collateral for the forthcoming loan and is the key to getting the lending process under way.
It is not uncommon for crucial paperwork to get lost amid the mounds of documents that have yet to make their way into a filing cabinet and, with the refinance looming, it may seem easier and faster to pay a title company to reproduce title files that already are in the franchisee’s possession – somewhere.
A title company is enlisted, in conjunction with the lender’s and borrower’s counsels, to work through the process and ensure that all necessary paperwork is in order for the loan, preferably for the franchisee-borrower to not have to pay for the same title files twice. For the franchisee, it is beneficial and cost-efficient to work consistently with a national title service. The associates assigned to the case will have a more thorough understanding of the existing collateral and corresponding title files, and can get the order placed in a timely and less costly fashion.
A commercial property title file will generally consist of at least the title commitment, copies of all exception documents, the conveyance and lien documents (recorded deed and mortgage) and the final title insurance policy.
The title commitment is a written report, which, among other things, identifies parties, properties and transactions to be insured and cites all current mortgages, liens, encumbrances and other matters affecting title to the properties prior to the finalization of the sale or loan. It shows the status of the title of the property up to the date of the transaction(s) being insured. In a commercial deal, exception documents will accompany the title commitment and, together, the files document every transaction (easements, takings, restrictions, liens and tax assessments) discovered during the relevant search period that affects the property. This provides the franchisee with the origin and ancestry of the investment and, upon review, can signal potential problems that may run contrary to the intended use of the property prior to its purchase.
Streamlining the Process
In many commercial deals, conveyance and lien documents for each property are delivered to the title company used in the sale or loan of that property and not directly to the buyer. If a closing is conducted by mail because of certain logistical issues, then the franchisee may fail to make a copy of the loan documents upon signing and returning to the title company. It then will fall upon the franchisee to contact the title company or attorney for copies of original documents and that likely will add to an already lengthy list of responsibilities.
The consistent use of the same national title service office offers the advantage of swift access to original title documents, including conveyance and lien documents, rather than the multistep process of contacting the title company or attorney, awaiting receipt of the documents, making a copy and sending to the lender for continuation of the loan process. The latter will cost for the time needed to produce the documents and delay the closing.
Possession of all exception documents referenced in the final title insurance policy can shave days or weeks off the closing schedule, as the title company only will need to obtain copies of any new documents relative to the property. Although online access to title documents is improving in the New England area, there is little uniformity among land records offices and, as compared with other areas of the country, is notoriously slow in producing title documents, with a minimum two-week wait time being fairly common. Title plant states, such as California, have a more rapid turnaround time, as national title companies have direct computerized access to county recorder databases, yet the overall process is unnecessarily delayed and needless costs are incurred in obtaining files that should already be on-hand.
Title searchers affiliated with a title company in non-title plant states may be required to undertake hands-on searches for title documents, as most counties do not have the resources to computerize this data. A searcher might need to drive to the recorder’s office to obtain the physical records whereby copies must be made. A property housed in a shopping center with 50 years of development could take days to research, which can add substantially to the bill at closing.
Costs associated with missing an important easement or lien in researching a property are hefty, as indicated by the American Land Title Association’s (ALTA) industry study listing title insurers as paying approximately $916.4 million in title claims in 2005. Based on the complex nature of the commercial real estate market, title researchers must be experienced, and it is important to use an established and reputable national title underwriter to mitigate risks that could result in lost time and money. Better yet, establish a filing system up front and appoint someone to manage all title files once a loan has been granted and the sale of the property executed.
An ALTA land title survey – a drawing of the boundaries of the property as identified by the deed – may also be part of the title file. It is strongly recommended that all franchisees obtain an ALTA survey prior to the purchase of a property, despite the average $1,200 cost, as it may signal potential problems that could impact the decision to purchase. Such a survey depicts the building as well as the setback lines, recorded documents referenced in the commitment, unrecorded easements, parking spaces and zoning requirements for the current use of the property. Franchisees are encouraged to pay as close attention to the legal descriptions of their investments as they do with other aspects of their business.
There are customers who have diverse geographical portfolios and view all 50 states as their own backyard. A national title service office is able to provide a quote on closing costs for even the most complex portfolios that may include investments in four different states with a total of 15 properties. Such an office will review search/exam fees, ranges of lender policy costs, whether a discount on premium is available due to an existing policy, whether there is mortgage tax in the jurisdiction and the correlating formula for the tax, as well as recording costs. The more accurate a quote on title, the better equipped the franchisee will be at accurately predicting the amount due at closing.
No matter the type of property or where it is located, time and money can be saved by keeping title files organized. Place a priority on this task now – before a refinancing is considered. It will be a worthwhile future investment, when time is of the essence and money is on the line.
