New challenges with title insurance for Native American land transactions are daunting but can certainly be overcome. Solutions that may have worked a year ago very well may not work today. Developers and tenants should be prepared for potentially significant delays in completing their transactions while the parties work to satisfy tighter title insurance underwriting standards and navigate each Community’s unique title process.
Title risks abound as commercial development on Native American land booms
Commercial development is booming at both Salt River Pima-Maricopa Indian Community and Gila River Indian Community. Numerous retail, industrial and even office projects are under construction at both Communities. Due to each Community’s proximity to freeways, airports and other amenities offered by neighboring cities, many developers are recognizing the potential value in developing their projects on Native American land. These projects present tremendous upside for developers who are willing to take on the additional risk that is inherent in Native American land transactions.
Native American land transactions have historically presented more risk than traditional transactions on fee land in neighboring cities such as Scottsdale and Phoenix for various reasons. The primary reason is due to the ground lease structure that is required by federal law, as federal law does not permit a developer to acquire fee title to Native American land. However, there are other important aspects of these transactions that also create additional risks, such as the length of time it takes to complete these transactions and concepts such as sovereign immunity and employment preference. Title insurance is generally available from most title insurance companies to help mitigate some of these risks. While title insurance is critical in nearly every type of commercial real estate transaction, it is especially critical for Native American land transactions.
In a typical Native American land transaction, an owner’s title insurance policy will insure that the ground leasehold interest is owned by either the developer or an end-user. Title insurance is also generally available for lenders who provide financing to developers with projects on Native American land. In these types of transactions, the lender’s security interest (i.e., the deed of trust) attaches to the developer’s ground leasehold interest instead of the fee. The lender’s title policy insures the priority of the lien, just as it would in a fee deal.
Obtaining title insurance and navigating the dual-title filing system can be daunting
However, recent changes in the title insurance industry are now making title insurance for these transactions more challenging to obtain. Due to recent court cases where title insurance companies were required to pay out claims on title policies insuring Native American land transactions, title companies are now imposing tighter title insurance underwriting standards in these transactions. Title companies are giving more scrutiny to every aspect of Native American land transactions that they are being asked to insure. The list of title requirements that need to be satisfied to obtain title insurance for a Native American land transaction could easily include two dozen title requirements — roughly twice as many as what you would find in a traditional fee deal.
Adding to these new challenges is the unique dual-title filing system for Native American land transactions. For these types of transactions, the Bureau of Indian Affairs (“BIA”) maintains a dual-title filing system through its land title records office (“LTRO”). As a result, transaction documents are both recorded with the local county recorder’s office (similar to what would happen in a typical fee deal) and filed with the LTRO. Title status reports are then generated by the LTRO to show the status of all documents that have been filed with the LTRO, similar to how title commitments are generated to show the status of documents that have been recorded with the county recorder’s office. Title insurance policies for Native American land transactions insure title through both the county records and the LTRO.
The tribes have different filing processes, further complicating matters
To complicate matters further, Salt River Pima-Maricopa Indian Community (“SRPMIC”) recently changed its process for filing documents with the LTRO. SRPMIC now handles this filing process internally. By contrast, Gila River Indian Community sends documents to an offsite BIA office for filing. This means that the two most active tribes in Arizona for commercial real estate transactions each handle the filing process and the preparation of title status reports in a completely different manner. These varying approaches create additional complexity for working with title companies to obtain title insurance for Native American land transactions.
As part of its efforts to file documents with the LTRO internally, SRPMIC has been working to clean up the chain of title on many projects located at SRPMIC due to problems with how documents were previously filed with the BIA in prior transactions. While many transactions at newer projects are still able to move forward relatively smoothly, some transactions at more established projects are facing new hurdles due to these prior filing problems. In fact, some developers and owners are now facing a seemingly impossible requirement to clean up prior chain of title issues to move forward with their transactions. This creates a particular challenge when entities that were involved with prior transactions no longer exist. In that situation, developers and owners need to find creative solutions in order to address any prior chain of title issues.
To have the best chance to complete these transactions, the parties need to have a keen understanding of the evolving title insurance landscape and work with title companies who are willing to find creative solutions to problems that may arise.
James Bond is the chair of Fennemore’s Real Estate Practice Group. He has broad experience involving Native American land transactions and is skilled at navigating the complexities of working with the different Communities and the Bureau of Indian Affairs. Jim has represented dozens of developers and investors in acquiring, selling, and financing Native American ground lease interests and managing the development process on tribal land. Reach him at [email protected].