Energy project finance lenders and tax equity purchasers, it is time to update your opening day lineup — otherwise known as the closing agenda checklist — to include new title insurance products. Citing the growing wind and solar energy project markets and their unique needs for title insurance coverage, the American Title Insurance Association (ALTA) issued a new series of endorsements for energy projects as well as a new form of zoning endorsement, effective April 2, 2012.
The problems ALTA attempted to address can be seen from a typical utility scale wind energy project – a 150 MW facility, with a total development cost of $220 million, which includes $150 million in project financing and a $50 million tax equity investment along with $20 million of equity from the developer. Through multiple long-term leases (or easements) the energy developer controls thousands of acres of almost entirely unimproved land, on which it will install (i) site improvements, such as roads, an energy collection system (transformers, switchgear, transmission lines), an Operations & Maintenance (O&M) building, and other related improvements at a cost of under $20 million and (ii) 100 1.5 MW wind turbines and tower assemblies at a cost of $180 million. The lender group wants a loan title policy in the amount of $150 million, and the tax equity partner wants an owner’s policy in the amount of $220 million.
The problem is the mismatch between the property interests typically covered by title insurance and the value of the improvements. Easement/leasehold interests are real property and some of the site improvements are probably universally characterized as real property or at least as fixtures. But the costs of the energy collection system and the turbines and their towers accounts for more than 90 percent of the total project development budget and would generally be characterized as personal property (although the tower foundation system might be a fixture). ALTA title insurance policies insures neither title to nor a lien upon personal property, which is where most of the project value resides. Also, the ALTA forms do not easily accommodate title claims that (i) arise from improvements constructed after the date of policy or (ii) affect less than all of the insured tracts.
The Series 36 (Energy Project) endorsements address these energy project issues in the following ways:
- where easements are used in lieu of leases, affirmative title coverage is given to those easement interests;
- valuation of title is expanded to include loss to the “integrated project” even though the covered claim affects fewer than all insured tracts;
- coverage is extended to claims for losses arising from improvements constructed after the policy date (provided those improvements are constructed in accordance with the project company’s plans);
- in calculating loss or damage under a covered claim, the insurer will include diminution in value of the insured’s interest in “Severable Improvements” – which are defined as improvements that are a functional part of an “Electricity Facility”, but which are characterized as personal property, i.e., the turbines and towers; and
- “Additional Items of Loss” policy section is tailored for energy projects.
So with the new ALTA Energy Series endorsements, the 2012 opening day lineup for the typical wind or solar energy project should include:
- Project Lenders: ALTA Loan Policy (2006), ATLA 3.2-06 (Zoning – Land Under Development), ALTA 35.3-06 (Minerals and Other Subsurface Substances – Land Under Development), ALTA 36.1-06 (Energy Project – Leasehold/Easement – Loan), ALTA 36.5-06 (Energy Project – Covenants, Conditions and Restrictions — Land Under Development – Loan).
- Tax Equity Purchasers: ALTA Owner’s Policy (2006), ATLA 3.2-06 (Zoning – Land Under Development), ALTA 35.3-06 (Minerals and Other Subsurface Substances – Land Under Development), ALTA 36-06 (Energy Project – Leasehold/Easement – Owners), ALTA 36.4-06 (Energy Project – Covenants, Conditions and Restrictions — Land Under Development – Owners).
While ALTA is the predominant title insurance industry trade association and most title insurers will issue title insurance consistent with its underwriting guidance, the ALTA forms are not universally accepted or used.