Deed of Trust

A Deed of Trust is an agreement between a lender (mortgagee) and borrower (mortgagor) whereby the mortgaged property is conveyed to a third neutral party, usually a title company, to be used as collateral while there is an outstanding mortgage. The mortgagor still holds equitable title, while the trustee holds legal title.

Putting ‘Deed of Trust’ in Context

Clearstream Capital, a private equity firm specializing in core-plus investments, is acquiring Greenfield Plaza, a 98,000-square-foot grocery-anchored retail center located in Birmingham, Alabama. The property includes a well-established regional grocery chain as its anchor tenant, alongside several smaller retail stores and service providers.

To finance the acquisition, Clearstream Capital secures a $12 million loan from a local bank, with a 65% loan-to-value (LTV) ratio based on Greenfield Plaza’s $18.5 million purchase price. Instead of a traditional mortgage, the bank requires the loan to be secured by a Deed of Trust.

How the Deed of Trust Works in This Scenario:

In this case, the borrower (mortgagor) is Clearstream Capital, the lender (mortgagee) is the local bank, and the trustee is a neutral third party—typically a title company or a law firm. The Deed of Trust arrangement means that while Clearstream Capital holds equitable title to Greenfield Plaza (they can operate, lease, and collect income from the property), the legal title is temporarily held by the trustee.

The trustee’s role is crucial in this structure. They hold legal title as a security measure, ensuring the bank’s interests are protected while the loan is still outstanding. If Clearstream Capital defaults on the loan, the trustee can begin the foreclosure process on behalf of the lender, expediting the process compared to traditional mortgage foreclosures.

Why a Deed of Trust?

In Birmingham, Alabama, where this property is located, the use of a Deed of Trust is common. It allows the lender to benefit from a non-judicial foreclosure process, which is often faster and less costly than a judicial foreclosure. If Clearstream Capital defaults, the trustee can sell Greenfield Plaza at auction without needing to go through the court system.

For Clearstream Capital, the Deed of Trust represents a strategic and relatively secure method of leveraging financing, as long as they can service the debt. The local bank, as the mortgagee, benefits from faster recourse to the collateral (Greenfield Plaza) if the loan terms are not met.

Conclusion

In this hypothetical case, the Deed of Trust serves as an efficient tool for both Clearstream Capital and the bank. The real estate private equity firm gains the capital needed for the acquisition of Greenfield Plaza, while the lender is protected by the trustee’s holding of legal title to the property. This structure, often favored in states like Alabama, ensures the rights of all parties are maintained while providing a streamlined process for recourse if necessary.