What Is Residual Value Insurance?
Residual value insurance (rvi) is used to guarantee the value of an asset at a specific date in the future. It is frequently applied to transactions involving automobile fleets, aircraft and real estate. Our expertise focuses solely on real estate.

How is it used?
Generally speaking, an owner of a real estate asset expects to benefit from the appreciation in value of that asset. The concept that he might lose money through depreciation in market value of the investment is typically not considered.

However, in the case where a highly leveraged loan is used to finance the property, the future value of the collateral takes on more prominence. In particular, if a borrower wants a loan that does not fully amortize during its term, the lender is at risk that the large final payment (balloon) will not be fully collateralized by the asset. In such a case, the lender may require that rvi be secured to guarantee that the asset will be of sufficient value to collateralize the balloon payment.

Most often, residual value insurance is applied to credit tenant loans (CTL’s) because there is little lender appetite for real estate risk in those transactions.

What does rvi do? How does it work?
Simply stated, an rvi policy will make the entire balloon payment to the lender, when due, in exchange for assignment of the mortgage. The insurer then has all the rights to recover its payment that the lender would have had in the absence of the insurance. It will likely foreclose on the property and take steps to enhance its value so it can be sold for the best possible price. It can also seek recovery from the borrower, just the same as the lender could have. It is important to note that the rvi policy is not usually written to protect the interests of the owner/borrower.

Who underwrites this type of insurance?
There are two predominant carriers writing rvi for real estate, and each has a different profile. A variety of factors will impact our selection of the appropriate carrier for a given deal. These include lender preferences, the level of rvi required and the type of risk to be insured. The carriers are rated A and AA, respectively, by S&P. Upon evaluation of the transaction, we will usually recognize that it fits one carrier better than the other and proceed accordingly.

How much does rvi cost?
The cost of the policy will depend on the type of risk to be insured, the amount of rvi needed and the particular carrier chosen, among other things. We can offer a good faith estimate to you based on the deal particulars available so that an informed decision of whether to proceed can be made prior to expending significant time and money.

To discuss a specific transaction and see how rvi may benefit you, contact us.