Written by Tray Traynor, Lead M&A Partner

Did You Know that RWI is now being utilized on real estate style transactions? As the RWI market continues to evolve and innovate, real estate has emerged as the top investment asset class poised to greatly benefit from a growing use of RWI.  This is a result of the product and process being tweaked to specifically fit a real estate style transaction vs. historically only fitting a traditional corporate style transaction.

Is RWI for Real Estate transactions expected to follow a similar growth trajectory of RWI as for corporate deals did?

• Short answer, yes
• 2013: only ~200 corporate style RWI policies were placed
• Current market: ~10,000 corporate style RWI policies are now placed annually
• 2022-2023: ~150+ RWI Real Estate style RWI policies placed
• Next two years?: exponential growth expected within the U.S. $700 billion real estate transaction market as awareness and education grows

What are the differences between RWI for real estate and RWI for corporate?

• Cost is lower (~1.5% of limit vs. 2.5% – 4.0%)
• Retention is lower (.25% vs. .50%-.75%)
• Specifically tailored to cover reps typically found in a real estate transaction such as Rent Rolls/Financials, Conditions of Property, Environmental, Condition of Assets, Affiliate Transactions, Compliance with Laws, OFAC, title, tax, and other fundamental reps
• Light-touch underwriting, specifically designed to match typical process in real estate deals
• Synthetic coverage provided for breach of Rent Rolls, Condition of Property, and Environmental reps – even when these reps are not given by the seller (asset deals)

Why are Real Estate buyers now turning to RWI instead of using traditional indemnity?

• Cost is very attractive compared to how much coverage is provided
• Provides a much better indemnity package for seller’s reps than buyers can typically get from real estate sellers
• Protects buyers against any possible gaps in diligence that may have inadvertently occurred
• Lenders are now starting to require RWI on any deal with LTV over 50%
• Enhances the deal by providing a “walk-away” option for seller
• Increases overall speed to close
• The only way for buyer to get coverage for breach of Rent Rolls, Condition of Property, and Environmental reps on asset deals when seller does not give those critical reps

What are the costs/Pricing Example

• Example deal size: $100M EV
• Limit: $10M
• Rate: 1.5% (of limit)
• Total Policy Costs: ~$200,000 – $215,000 (inclusive of taxes and fees)
• Retention: .25% ($250K), dropping to .1% ($100K) at 12 months post-close
• The economics are compelling – the buyer gets $10M of coverage for only ~$200K
• Costs are often split between buyer and seller.

What types of real estate buyers are using RWI?

• Real estate focused PE Funds
• REITs
• Investment managers, owners, and developers of real estate assets

What are the most common asset classes where RWI is used?

• Multi-family/single-family residential
• Retail/shopping malls
• Senior living/nursing homes
• Office
• Warehouse
• Office
• Any asset class is eligible (even land)

What is the percent breakdown by deal type?

• Asset deals ~ 45%
• Stock deals ~ 40%
• REIT deals ~ 15%

Data from CFC.