Title Theory States

Title theory states are those states in which the borrower in a loan on the property does not hold the property’s title during the loan term. Rather than a mortgage, the lender holds the title through a Deed of Trust. Once the loan is paid off, the lender, through a Deed of Reconveyance, removes its interest in the property and transfers title back to the borrower.

Putting ‘Title Theory States’ in Context

In Texas, a title theory state, the dynamics of real estate transactions can differ significantly from those in lien theory states. For example, consider the scenario involving FlexRevamp Development and their project, the Austin Flex Innovation Hub.

FlexRevamp Development, a real estate developer, undertook the redevelopment of an industrial flex property in Austin, aiming to transform it into a hub for tech and manufacturing firms. The property, named Austin Flex Innovation Hub, spans 150,000 square feet with plans for extensive modernization to attract leading tech companies.

Due to Texas being a title theory state, the property’s title was held by the lender through a Deed of Trust while the loan was outstanding. This arrangement provided the lender with security and allowed FlexRevamp Development to leverage financing for their ambitious redevelopment project.

The total investment for the Austin Flex Innovation Hub was projected at $45 million, with a forecasted annual net operating income of $3.6 million, reflecting an 8% capitalization rate upon completion. The financial arrangement under the title theory allowed FlexRevamp to execute their redevelopment plans effectively, knowing the property title would revert to them upon loan repayment through a Deed of Reconveyance issued by the lender.

This mini-case exemplifies how title theory affects financing and ownership in real estate development within title theory states like Texas, providing a secure framework for lenders while enabling developers to undertake substantial projects.