REAL ESTATE FINANCING, SURVEYS, CLOSING COSTS & TITLE INSURANCE
Harvey Labovitz, Esq.
Collins & Scanlon LLP
Real estate development is a sophisticated business activity, requiring careful counseling
and experience. A survey of important aspects of real estate financing, surveys, closing costs
and title insurance follows.
Conventional Financing.
In the real estate industry, the term “conventional financing” means that type of loan that
Fannie Mae and Freddie Mac will buy to afford local lenders more cash to make additional
loans. Fannie Mae and Freddie Mac buy only those loans that meet certain specified standards,
and those loans are called “conventional financing.” Fannie Mae and Freddie Mac buy only
residential loans.
In the commercial context, there really is no such animal as the “conventional loan,”
except that the term is still used to describe a commercial transaction in which a lender requires a
borrower to put up a certain amount of the project costs, say 10 to 20%, and the lender will lend
the balance pursuant to customary terms and interest rates with loan documents evidencing,
governing, and securing the loan. The interest rate on such financing may be fixed or adjustable.
The documents normally required by a lending institution for a conventional loan will be the
following:
1.
Construction Loan Agreement, which, in the event the construction, remodeling,
rehabilitation or other improvements are erected with proceeds of the loan, sets forth the
respective obligations of the lender and borrower with respect to the use of the proceeds,
advances by the lender, and repayment by the borrower. The loan documents hereinafter
described set forth the obligations of the borrower in more detail.
2.
Promissory Note, setting forth the terms of the loan, with a cognovit provision.
3.
Open-End Mortgage, Security Agreement, Assignment of Leases and Rents, and
Fixture Filing, which grants the lender a mortgage on the property, a security interest on all
personal property and fixtures associated with the real property, and an assignment of the rents
and leases of occupiers of the property, if any.
4.
Assignment of Rents and Leases, which is a separate document from the
Mortgage but which customarily sets forth in greater detail the rights of the lender in the event of
a default.
5.
Personal Guaranty. The borrower’s individual owners or affiliates may agree to
guarantee the repayment of the loan. If the loan is non-recourse, then a guaranty by the
principals of the borrower and/or affiliated entities of so-called “carve-outs” from the nonrecourse language will be required. Such carve-outs normally include damages to the property
or lender resulting from violations of environmental covenants; misapplication of rents or other
income derived from the operation of the property; and failure to pay real estate taxes in a timely
fashion.
6.
Environmental Indemnity Agreement, in which the borrower and its principal(s)
represent that the property complies with all environmental laws and in which they covenant to
indemnify the lender in the event of a violation of such laws.
7.
Guaranty of Completion, in which the principal of the borrower guarantees the
completion of any construction paid for by proceeds of the loan.
Forms of the foregoing documents are attached hereto.
Creative Financing.
In addition to conventional financing, there are a number of other methods of raising
money for the purchase and/or construction of property that are currently used. Among them are
the following:
1.
Private Placements.
In the event that the amount of a loan obtainable by the borrower plus the borrower’s own
equity do not equal the actual cost of a real estate project, it is not unusual for the borrower to
obtain additional financing through the use of a private placement. A private placement is the
sale of securities, usually limited partnership interests, liability company membership interest, or
corporate stock to a small number of qualified investors, by complying with Ohio’s Blue Sky law
and the federal statutes and regulations exempting certain types of sales from full-blown
regulation. The advantage of using a private placement is the ability to obtain the necessary
funds to complete the project. The disadvantages include the necessity, in certain situations, of
preparing a comprehensive private placement memorandum that complies with applicable state
and federal laws; the possibility of having to negotiate with a brokerage firm on the terms of the
offering if the brokerage firm will place the securities with their own clients; and the necessity of
reporting to the investors as required by state and federal law and pursuant to the organic
documents contained in the private placement memorandum.
2.
Internal Revenue Code §1031 Like-Kind Exchanges. Refer to earlier portion
of Materials.
3.
Tax Increment Financing (TIF). Ohio Revised Code § 5709.41 permits projects
to be funded by the tax increase (the “increment”) generated by the development of the subject
property.
Ohio’s tax increment financing (TIF) enables counties, municipalities, and townships to
exempt from real property taxation the new value added to a parcel or group of parcels as a result
of new property investment. TIF can be used with residential development as well as
commercial development. It is a way for local governments to fund public infrastructure
improvements (such as roadways, bridges, ditches, water and sewer lines) associated with new
development. Ohio Revised Code §§5709.40-43 is the enabling legislation for municipalities;
§§5709.73-74 is the enabling legislation for townships; and §§5709.77-79 is the enabling
legislation for counties.
The enabling legislation provides the general framework under which TIF can be used,
but local governments have the freedom to decide where and when to implement TIF. An
example of when TIF can be useful is when a developer has 15 acres on which new homes will
be built, but the proposed new investment would not be feasible without improvements to
existing roadways, water, sewer and other utilities. Ordinarily, such infrastructure improvements
are tied to a governmental capital improvements plan that is long-range in nature. If the
community were in need of additional new housing but did not have financial ability to finance
the needed infrastructure, the local government would be faced with a dilemma -- where to
obtain the money necessary to construct the infrastructure.
A TIF might work, as it provides for the exemption of taxes associated with the increased
value of the proposed development, and also provides for the creation of a special fund (a debt
retirement fund) that is designed to exempt a portion of the new taxes generated from the
proposed new development. Up to 75% of the new taxes associated with the increased valuation
resulting from the new investment can be exempted for up to 10 years. With formal concurrence
from the boards of the affected school districts, up to 100% of the new taxes can be exempted up
to 30 years. If, in this example, 75% of the new real property taxes associated with the new
investment are TIFed for 10 years, then the value of the property tax exempted is redirected, or
paid in lieu of taxes (PILOT), by the taxpayer to a special fund set up by the county auditor.
Payments to this special fund are drawn down to retire the infrastructure debt incurred by local
government. PILOTs are made at the same time property taxes are due and cannot exceed the
annual debt service of the notes or bonds used to finance the public infrastructure improvements.
In TIF, five principal players have roles: Local legislative authorities must determine the
cost of the public infrastructure under consideration and propose ordinances declaring the
infrastructure to be a public purpose necessary for the development of certain parcels of land.
Thereafter notice and hearing is conducted within the timeframes of the statutes, a revenue
sharing agreement between the school board and public authority. The TIF related and PILOT
agreement must be submitted to Ohio Department of Development within 15 days of enactment.
The county auditor works with the local legislative authorities to obtain the market value and
taxable value of the proposed new real estate development and to project the tax revenues
resulting from the increased real property investment. The property owner enters into a contract
with the local legislative authority describing the obligation to make PILOTs. The county
treasurer creates a tax equivalent account to accept the PILOTs. The school board approves
resolutions that provide for exempted percentages of more than 75% and/or district life of more
than 10 years. If the school board does not accept the proposal, the statute provides that a
resolution may be certified by the legislative authority with no provision for compensation
percentage for the affected school district.
4.
Port Authority Financing. Pursuant to § 4533.47 of the Ohio Revised Code,
duly constituted port authorities have the authority to engage in development financing pursuant
to the requirements of the statute. For instance, the Development Finance Authority was created
by the Cleveland-Cuyahoga County Port Authority in 1993 and it provides for fixed-rate
financing, off-balance-sheet financing and leasing, and infrastructure financing. An application
form for Port Authority financing is attached hereto. Under its fixed-rate financing program, a
developer may borrow between $1.5 and $6 million for the acquisition and development of fixed
assets, such as land, buildings and equipment for fixed rates for terms up to 25 years. The offbalance-sheet financing and leasing program is intended for companies that wish to obtain a new
facility but do not want the asset to appear on their balance sheet. The Port Authority will own
the property and the developer will lease it from the Port Authority. In some cases it provides
for 100% financing and may lower the cost of materials used in the construction of the building.
The developer may choose from three different kinds of leases: financing lease, operating lease,
or a synthetic lease. The infrastructure financing program permits developers to finance public
infrastructure projects, such as streets, roads, underground utilities, sidewalks, street lights,
landscaping and public parking garages, particularly suitable for mixed use developments. The
following entities have taken advantage of Port Authority financing for the construction and
development of their projects:
a.
b.
c.
d.
e.
f.
g.
h.
Cleveland Clinic Foundation
Council for Economic Opportunities in Greater Cleveland in connection with Steel Group
MetroHealth
University Heights Public Parking Garage (attached to the shopping mall at the former
Kaufmann Dept. Store at Warrensville and Cedar Roads in University Heights )
Rock and Roll Hall of Fame and Museum (the Port Authority owns the facility, leases it
to the Museum on a 50-year lease term with an option for a 49-year renewal). This bond
issue had a $2.1 million per year guaranty from the State of Ohio and the source of
repayment of the bonds were back taxes from Cuyahoga County.
Cleveland Stadium (the Port Authority acted as a conduit financing vehicle of the City of
Cleveland. The ground lease was granted to the Port Authority from the City and the
Port Authority leased it back to the City.)
Office Max-Highland Hills headquarters (The Port Authority owns the project and leases
it to Office Max through a synthetic operating lease. The company may buy the project
at the end of the lease term for a price equal to the unamortized portion of the financing.)
Luigino’s, Inc. (for this Jackson OH food-processing facility, the Port Authority issued
$5 million in taxable revenue bonds through its fixed-rate financing program for a 15year term in a fixed interest rate.)
5.
Economic Development Financing.
Many municipalities and counties have economic development departments established
for the purpose of encouraging the retention and establishment of business enterprises within
their jurisdiction and the attraction of new businesses. There are a wide variety of economic
programs available in these governmental agencies. The following is a summary of the types of
programs that are available from the City of Cleveland Department of Economic Development.
(A) Small Business Revolving Loan:
Provides for low cost loans for the acquisition of fixed assets (land, buildings, and equipment)
and/or construction. Funded with UDAG, CDBG or EDA Repayment Revenues.
Eligible Projects: Any Cleveland business project that will retain or create jobs.
Loan Amounts: Limited to $50,000 times the number of jobs, retained or created, up to 40% of
project financing not to exceed $500,000.
Rates: 75% of prime, subject to negotiation.
Collateral: Lien positions on fixed assets subordinated to first position financing.
Security: Corporate and/or personal guaranty(ies).
Term: Useful life of the pledge asset up to 20 years.
(B) Neighborhood Development Investment Fund:
Provides gap financing for large-scale economic development and housing ventures, and to
finance acquisition and site preparation costs associated with industrial and commerce park
developments.
Eligible Projects: Business expansion or retention projects that preserve or create at least 100
jobs. Projects must be located in a Cleveland neighborhood.
Loan Amounts: $500,000 minimum; up to 25% of project financing but no more than $2
million.
Rates: Standard rate of 4% fixed, subject to negotiation.
Collateral: Lien positions on fixed assets subordinated to first position financing.
Security: Corporate and/or personal guaranty(ies).
Term: Useful life of the pledge asset up to 20 years.
(C) Enterprise Zone Tax Incentive Program:
Provides 60% real and personal property tax abatement for business retention and expansion
projects located outside the central business district.
Eligible Projects: Must meet minimum qualifying investment levels established by state law and
demonstrate that “but for” the abatement the project would not go forward.
Investment Eligible for Abatement: Real property improvements (renovation or construction);
new machinery; equipment; fixtures and inventory
Term: Ten (10) years maximum.
(D) Core City Loan Fund:
Provides funding to undertake targeted development projects, to assist business expansion, retain
and create jobs within the City of Cleveland, and increase the City’s tax base. Provides
financing assistance for projects that have strategic business retention, expansion and attraction
implications or have catalytic or transforming impact with respect to stimulating opportunities
for job creation. Intended to help fill the gap between total project costs and the amount of
private investment that can be attracted to support a project.
Eligible Projects; Borrower must:
(a)
(b)
(c)
Contribute at least 10% equity toward total project costs.
Demonstrate sufficient experience and project management capabilities to successfully
complete the project.
Comply with all City of Cleveland requirements including, without limitation, the Fannie
M. Lewis Cleveland Resident Employment Law and the Minority Business and Female
Business Enterprise Code.
Loan Amount: $100,000 to $500,000 but not to exceed 40% of the total project cost.
Interest Rate: Subject to negotiation based on the cost of funds and percentage of total project
costs to be financed through Core City Funds.
Long Term: Up to 20 years for real estate investments, and lesser of 10 years of life of the asset
for non-real-estate investments.
Security:
(a)
(b)
(c)
Subordinate mortgage, or shared first mortgage position on the real estate and
improvements.
Lien position on fixed asset(s) subordinated to first position financing.
Corporate guarantees and/or personal guarantees from the principals of the Borrower and
any other individual or entity as determined necessary.
Underwriting Requirement:
(a)
(b)
Minimum debt service coverage of 1.10x.
Loan to value ratio of no more than 90%; 80% preferred.
Uses: Part of the costs of acquisition of lands, buildings, machinery, and equipment; the
construction, expansion or conversion of facilities, and other capital costs.
Approvals: Loans must be reviewed and approved by the City’s Department of Economic
Development, Cleveland Citywide Development Corporation and Cleveland City Council.
(E) Tax Abatement:
Under new regulations proposed by Mayor Jackson, the City will consider tax abatement for up
to ten (10) years if the property will be improved by a factor of more than 50% of its existing
value. The City is also considering programs that will drop the interest rate to 0% or forgive part
of the loan, rather than use tax abatement, so that the same economic result will be achieved.
6.
Empowerment Zone. Certain municipalities, such as City of Cleveland, have
developed empowerment zones sponsored by the U.S. Dept. of Housing and Urban Development
to help reinvest in certain urban communities. The communities in Cleveland include Fairfax,
Glenville, Hough and Midtown. Empowerment zone eligible businesses may receive real estate
loans for business expansion or relocation of an existing business; asset and equipment loans;
credits and rebates for small businesses for interior and exterior renovations of property meeting
certain approved design standards; one of the programs available for empowerment zone
businesses is the HUD-108 real estate loan in which the borrower must contribute at least 10% of
the cash equity toward the project. the borrower(s) (i) must be able to demonstrate sufficient
experience and management capabilities; (ii) use best efforts to participate to the labor force
development programs of the empowerment zone; and (iii) must pay employees Davis-Bacon
prevailing wages and if applicable must meet minority/female enterprise requirements. Loans
are limited to $50,000 for every job retained or created, and the minimum amount of the loan is
$25,000 with a maximum of $5 million, up to 60% of the total project cost. The term of the loan
can be up to 15 years subject to the useful life of the asset to be financed, the current interest is a
6% fixed rate, and the processing equals 2% of the loan not to exceed $2,000 for non-profit
organizations.
7.
Charitable Deductions and Tax Credits through the Use of Conservation and
Façade Easements and Rehabilitation of Historic Structures.
The Federal Historic Preservation Tax Incentives program aids in the private sector
rehabilitation of historic buildings and promotes economic revitalization. The program is
available for buildings that are national historic landmarks, that are listed in the National
Register, or that contribute to National Register historic districts and certain local historic
districts. Properties must be income-producing and must be rehabilitated according to standards
set by the Secretary of the Interior.
The program is jointly managed by the National Park Service of the Internal Revenue
Service, in conjunction with State historic preservation offices.
Two of the measures used in the program are the creation of a façade easement, which
protects the façade of the particular building and prohibits the modification of the façade, and an
air rights easement (sometimes called a conservation easement), which preserves the space above
the building. An easement is given by the building owner to a charity and the value of easement
is established as a deduction for the property owner under IRC 170(h). The definition of an
historic building is contained in the Code and usually means a building constructed before 1936.
Attached to this paper are a form of Deed of Historic Preservation and Conservation
Easement for a façade easement and a Deed of Historic Preservation and Conservation
Restriction for air-rights restriction. Those respective documents contain references to the Ohio
and Federal laws and regulations to which an owner must adhere to be able to take advantage of
the tax incentives. Also worth reviewing are IRS Regulations 26 CFR 1.4-12, IRC Section 47
regarding rehabilitation credits, and IRS Code 170(h) regarding qualified charitable
contributions.
The Internal Revenue Service also employs 20% tax credits for rehabilitation
expenditures made with respect to buildings placed in service before 1936 and buildings that are
certified as historic structures (IRC 47). The credit is equal to 10% of the expenditures for
qualified rehabilitated buildings first placed in service before 1936. A 10% credit is generally
available for non-residential real property, residential rental property, or any addition or
improvement to these properties. A 20% credit is available for certified historic structures (both
residential and non-residential buildings) that are listed in the National Register or located in a
registered historic district and certified as being of historic significance to that district. The basis
of the rehabilitated property is reduced by the amount of the rehabilitation expenditure credit
claimed, thereby reducing the amount of depreciation that can be taken. The standards for
rehabilitation are explained in detail at 36 CFR Part 67.
Another positive feature of rehabilitation of historic structures is the ability of a profitable
for-profit entity to invest in the owner or lessee of the property and reap the tax credits in
exchange for an infusion of cash. Transactions of this kind are complex, but the investing entity
usually owns 99% or more of the equity in the entity, and the original promoter owns 1% or less
but is rewarded by income generated by managing the project.
A credit is available for low-income housing constructed, rehabilitated or acquired after
1986 (IRC 42). The credit may be claimed over a 10-year period in a maximum amount that
depends on whether the low-income units are newly constructed or rehabilitated, or acquired,
and whether the cost was partially financed by federal subsidies. The credit is available on a perunit basis and a single building will not be disqualified on the basis that some units did not
qualify for the credit. However, the project must meet specific requirements for qualification for
the credit.
It goes without saying that under the foregoing federal programs, numerous statutes and
regulations must be adhered to carefully before the charitable deduction or tax credits are
available.
8.
Wrap-Around Mortgage. In times of high or rapidly increasing interest rates, it
is fairly common to negotiate wrap-around mortgages. The wrap-around, or “wrap,” mortgage is
simply a junior mortgage that is subordinate to the existing mortgage carried by the owner/seller
of the property. The wrap mortgage, in which the buyer is the grantor, is for the amount of the
first mortgage plus a negotiated amount less and/or up to the sales price minus the downpayment
and closing costs. The seller continues to pay the first mortgage with the proceeds he receives
from the wrap mortgage. Once the wrap mortgage is satisfied, the seller is out of the picture,
although it is rare that this would occur. The wrap mortgage customarily bears a higher interest
rate than the senior mortgage, thereby permitting the seller to make a “profit” on the transaction.
In this way, the buyer obtains the advantage of maintaining a smaller mortgage on a substantial
amount of the purchase price and of dealing with the seller rather than a lending institution, and
the seller has the advantage of generating a profit on other people’s money. There are few wraps
today because of low interest rates and the first mortgage must be assumable, and today only
FHA mortgages are assumable. Most mortgages have a due-on-sale clause to prevent the use of
wrap-arounds, and the danger arises if the first mortgagee discovers the existence of the wrap
mortgage.
City of Cleveland Economic Development Programs
1. Small Business Revolving Loan:
Provides for low cost loans for the acquisition of fixed assets (land, buildings, and equipment)
and/or construction. Funded with UDAG, CDBG or EDA Repayment Revenues.
Eligible Projects: Any Cleveland business project that will retain or create jobs.
Loan Amounts: Limited to $50,000 times the number of jobs, retained or created, up to 40% of
project financing not to exceed $500,000.
Rates: 75% of prime, subject to negotiation.
Collateral: Lien positions on fixed assets subordinated to first position financing.
Security: Corporate and/or personal guaranty(ies).
Term: Useful life of the pledge asset up to 20 years.
2. Neighborhood Development Investment Fund:
Provides gap financing for large-scale economic development and housing ventures, and to
finance acquisition and site preparation costs associated with industrial and commerce park
developments.
Eligible Projects: Business expansion or retention projects that preserve or create at least 100
jobs. Projects must be located in a Cleveland neighborhood.
Loan Amounts: $500,000 minimum; up to 25% of project financing but no more than $2
million.
Rates: Standard rate of 4% fixed, subject to negotiation.
Collateral: Lien positions on fixed assets subordinated to first position financing.
Security: Corporate and/or personal guaranty(ies).
Term: Useful life of the pledge asset up to 20 years.
3. Enterprise Zone Tax Incentive Program:
Provides 60% real and personal property tax abatement for business retention and expansion
projects located outside the central business district.
Eligible Projects: Must meet minimum qualifying investment levels established by state law and
demonstrate that “but for” the abatement the project would not go forward.
Investment Eligible for Abatement: Real property improvements (renovation or construction);
new machinery; equipment; fixtures and inventory
Term: Ten (10) years maximum.
4. Core City Loan Fund:
Provides funding to undertake targeted development projects, to assist business expansion, retain
and create jobs within the City of Cleveland, and increase the City’s tax base. Provides
financing assistance for projects that have strategic business retention, expansion and attraction
implications or have catalytic or transforming impact with respect to stimulating opportunities
for job creation. Intended to help fill the gap between total project costs and the amount of
private investment that can be attracted to support a project.
Eligible Projects; Borrower must:
(a)
(b)
(c)
Contribute at least 10% equity toward total project costs.
Demonstrate sufficient experience and project management capabilities to successfully
complete the project.
Comply with all City of Cleveland requirements including, without limitation, the Fannie
M. Lewis Cleveland Resident Employment Law and the Minority Business and Female
Business Enterprise Code.
Loan Amount: $100,000 to $500,000 but not to exceed 40% of the total project cost.
Interest Rate: Subject to negotiation based on the cost of funds and percentage of total project
costs to be financed through Core City Funds.
Long Term: Up to 20 years for real estate investments, and lesser of 10 years of life of the asset
for non-real-estate investments.
Security:
(a)
(b)
(c)
Subordinate mortgage, or shared first mortgage position on the real estate and
improvements.
Lien position on fixed asset(s) subordinated to first position financing.
Corporate guarantees and/or personal guarantees from the principals of the Borrower and
any other individual or entity as determined necessary.
Underwriting Requirement:
(a)
(b)
Minimum debt service coverage of 1.10x.
Loan to value ratio of no more than 90%; 80% preferred.
Uses: Part of the costs of acquisition of lands, buildings, machinery, and equipment; the
construction, expansion or conversion of facilities, and other capital costs.
Approvals: Loans must be reviewed and approved by the City’s Department of Economic
Development, Cleveland Citywide Development Corporation and Cleveland City Council.
5. Tax Abatement:
Under new regulations proposed by Mayor Jackson, the City will consider tax abatement for up
to ten (10) years if the property will be improved by a factor of more than 50% of its existing
value. The City is also considering programs that will drop the interest rate to 0% or forgive part
of the loan, rather than use tax abatement, so that the same economic result will be achieved.
SURVEYS
There are basically three kind of surveys that are useful in the acquisition of property.
There are mortgage location surveys, boundary surveys, and ALTA/ACSM surveys.
I.
Mortgage Location Survey. This is the most basic of the three location surveys
and is used primarily by title companies in connection with the issuance of title insurance to the
buyer of the property. The survey itself is usually a scale drawing of the property with a drawing
of any buildings within the property lines. The purpose of a mortgage location survey is
generally to ascertain that the building is within the property lines and that there are no serious
encroachments.
The Ohio Administrative Code sets forth the standards for mortgage location surveys at
Chapter 4733-38. The purpose of the mortgage location survey is to establish that there is
sufficient proof submitted to the mortgage lender and/or title insurer that the building and/or
other improvements are actually located on the land covered by the legal description in the
mortgage. The mortgage location survey is provided by a professional surveyor solely for the
intended use by the mortgagee and title insurer. The surveyor must use a legal description
furnished by the client to perform the survey, and if there are apparent insufficiencies, the
surveyor shall so advise the client. After review of the documents provided by the client, the
surveyor must make a field investigation of the property to search for physical monuments and
analyze evidence of occupation. The standards set forth specifications for measurement and
specifications for the completion of the survey plat.
II.
Boundary Survey. The purpose of a boundary survey is to establish or trace
property boundaries. Again the surveyor must consult deeds or other documents to assemble a
set of written evidence of the boundary and the surveyor shall conduct an actual field
investigation of the property, searching for physical monuments and evidence of monumentation
and occupation. If necessary, the surveyor must set boundary monuments, so that upon
completion of the survey each corner of the property and each referenced control station will be
physically monumented. Chapter 4733-37 of the Ohio Administrative Code governs the
preparation of boundary surveys. The Chapter sets forth specifications for the monumentation
and measurement of the property and rules for the preparation of the plat of survey to be
prepared by the surveyor, as well as specifications for the drafting of a legal description, if
necessary.
III.
ALTA/ACSM Survey. This survey is the most comprehensive and accurate of
the various types of surveys. It is prepared according to standards set by the American Land
Title Association and American Congress on Surveying and Mapping. An ALTA survey is
prepared for the benefit of the title industry and lending industry. A lender will want to be
assured that the property it is securing by its mortgage is the actual property described in the
legal description, that it is not impaired by adverse easements, and that here is no other condition
which will impair the value of its security. If a title insurer is asked to remove the “standard
exceptions,” including the survey exception for the issuance of a title or loan policy, a title
insurer will not do so unless it receives an ALTA survey certified to it.
The specifications of an ALTA/ACSM survey are complex. Attached to this paper is a
copy of the latest version of the ALTA/ACSM standards to which a professional surveyor must
adhere to comply with the requirements of the lender and title insurer. Also attached is a typical
surveyor’s certificate affixed to the Plat of Survey assuring the lender, title insurer and owner or
buyer of the property of the condition of the property.
The cost of the various types of surveys varies considerably, and it is based upon the size
and nature of the property and the type of survey. A mortgage location survey may cost as little
as $100, because the surveyor’s work is minimal. A boundary survey will cost substantially
more because the surveyor will have to take actual measurements ad do substantial “field” work
to prepare the survey. An ALTA/ACSM survey will be the most expensive.
There are no set fees in the surveying industry for the preparation of a survey. A survey
of a relatively modest size parcel (for example, 2 acres) may cost as much as $1,500 to $2,500
depending upon the topography of the land. If it is a flat field without excessive vegetation, it
will be less expensive than an area of forest that is hilly and strewn with boulders. Key factors in
maintaining a reasonable cost are advising the surveyor as soon as possible of the work to be
done, providing him with a title commitment with all supporting documents as early as possible,
and the existence of clear, decent weather. It will be necessary to confer with the surveyor to
establish a framework for the cost of a survey.
The field work that the surveyor undertakes and the measurements resulting therefrom
and from documents of record is the actual “survey.” The drawing that results from the
surveyor’s measurements and documents of record is called the “plat of survey.” The plat is
what is furnished to the title insurer and lender for their respective review of the condition of the
property.
The 2005 Minimum Standards Detail Requirements for the ALTA/ACSM land title
surveys, a copy of which is attached to this paper, sets forth the requirements of an ALTA survey
and Table A sets forth specific matters that the lender, title insurer and/or owner/buyer may
require for the survey.
Closing Costs.
Closing costs for a typical real estate purchase and sale transaction are enumerated,
typically, in an HUD-1 Settlement Statement prepared by the escrow agent. A copy of that form
is attached hereto. The following constitute estimated closing costs for a typical transaction:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Title Search/exam fee ($500)
Title Commitment fee ($100)
Premium for owner’s fee policy
Owner’s endorsements
Escrow fee - variable ($350.00 - $500.00)
Conveyance fee ($4.00 per $1,000 of purchase price) (O.R.C. § 319.202)
Transfer tax ($0.50 per parcel) (O.R.C. § 319.202)
Recording fees - $28 for first 2 pages; $8 per page thereafter (see attached fee list)
(O.R.C. § 317.32)
Tax prorations
Real estate broker’s commission - variable
Mortgage brokers’ fee - variable
Attorney fee for lender’s outside counsel, if applicable - variable
The conveyance fee is paid for customary arm’s-length transactions. There are a number
of transactions which are exempted from the requirement of the payment of conveyance fee. See
O.R.C. §§ 319.202 and 319.54(F)(3). Such transactions are set forth on the conveyance fee
exemption form that is attached hereto. It is not unusual for the county auditor to require a brief
explanation of the transaction, to justify its exemption, to be set forth on the reverse side of the
exemption form. One may anticipate such a request for exemption under Section M. Copies of
the Real Property Conveyance Fee form and Exemption form are attached hereto.
Real estate tax prorations are calculated by the escrow agent (in localities where it is
customary to employ an escrow agent). In Ohio, real estate taxes are paid in arrears, that is,
taxes for the first half of the calendar year 2006 will be paid in the first tax collection period for
2007, typically in January or February. As a consequence, if a real estate transaction is closed
during the first half of the year, the escrow agent will prorate taxes from January 1 of that year
through the closing date. If the taxes have been paid timely by the seller, then the buyer will be
required to contribute to the closing amount, the amount of taxes from the closing date through
June 30 of the closing year. On the other hand, if the taxes have not been paid by the seller, then
the escrow agent will pay the taxes at closing and the amount paid will be credited against the
proceeds of the sale otherwise due to seller.
TITLE INSURANCE
The term “title insurance” is a generic term that refers to a variety of insurance policies
issued by title insurance companies for the protection of purchasers and lessees of real property
and lenders whose security consists of encumbrances on real property. The most common types
of policies used in commercial transactions are the following:
1.
2.
3.
4.
Owner’s Policy of Title Insurance
Loan Policy of Title Insurance
Leasehold Owner’s Policy of Title Insurance
Leasehold Loan Policy
A title insurance policy is an indemnity contract for actual monetary loss that the insured
sustains. the title insurance policy does not guarantee that contingencies insured against will not
occur or that title will be as set forth in the policy.
The following are examples of how title insurance will affect a buyer of land:

After the buyer completes the purchase transaction, it learns that past due taxes are owed
on the property. The past due taxes, however, are not listed as an exception to coverage
in the policy. The title insurance company must then pay the owner the amount of taxes
due, up to the policy amount.

The buyer purchases property from the estate of a decedent and, after closing, discovers
that the decedent’s family has filed a lawsuit challenging the conveyance for several
reasons. The title insurance policy does not contain an exception for such claims of title
by the relatives. The title insurance company must hire legal counsel to defend the
buyer’s title to the property in order to obtain clear title. If clear title cannot be obtained,
the title insurance company will indemnify the owner up to the policy amount for the loss
of title.

The buyer purchases a parcel of mostly vacant land on which a gravel path traverses the
property. The title policy does not contain an exception for the path, but does contain an
exception for rights of parties in possession and for visible and apparent easements. The
buyer had assumed the gravel path was used solely for internal access within the
property. It is later discovered that the path has been used for over 40 years by adjoining
landowners to access their property from a public road. Because of the exceptions in the
title policy and the fact that the path is apparent, the title insurance company will not
cover the loss incurred. The owner must deal with the path on its own.
II. Title Policies and Commitments for Title Policies.
Following are brief descriptions of common types of insurance policies.
A.
Title Commitment.
A title commitment is a document issued early in the purchase and sale process by a title
insurance company or agency for the benefit of the prospective buyer and lender, if applicable,
and it is the title insurance company’s proposal for a title insurance policy. and the Commitment
reflects the underwriter’s conclusions as to the encumbrances and other matters affecting title,
based on a search of public records. The title commitment is composed of three parts. Schedule
A sets forth the identity of the fee holder of the property; the amount of the purchase price, or in
case the commitment is for the benefit of a lender, the amount of the proposed loan; and the legal
description of the property. Schedule B, Section 1 sets forth all necessary action that must be
completed before the closing of the transaction as contemplated by the seller and buyer. For
example, it will state that the current mortgage must be satisfied of record. Schedule B, Section
2 sets forth the exceptions to the title as disclosed by the public records. The commitment will
show a set of standard exceptions, which consist of the following:
(a)
Defects, liens, encumbrances, adverse claims or other matters, if any, created, first
appearing in the public records or attaching subsequent to the effective date hereof but
prior to the date the proposed Insured acquires for value of record the estate or interest or
mortgage thereon.
(b)
Assessments, if any, not yet certified to the County Auditor.
(c)
Rights or claims of parties other than Insured in actual possession of any or all of the
property.
(d)
Easements or claims of record not shown by the public records, boundary line disputes,
overlaps, shortages in area, encroachments, and any matters not of record which would be
disclosed by an accurate survey and inspection of the premises.
(e)
Unfiled mechanic’s or materialman’s liens.
(f)
No liabilities assumed for tax increases occasioned by retroactive revaluation, change in
land usage, or loss of any homestead exemption status for insured premises.
After the standard exceptions, the list of specific exceptions will be set forth and they
may, although not necessarily, include matters such as utility easements, access easements,
mineral rights, recorded leases, and other matters of record. A typical commitment is attached to
this paper as Annex A.
Once the Commitment has been issued, the surveyor, if any, will be able to complete the
survey by showing and identifying all exceptions listed in Schedule B, Section II, of the
Commitment.
Once the survey is complete, the parties and attorneys will be in position to review the
Commitment and the survey together in order to evaluate potential problem areas. As the
problem areas are addressed and rectified, if necessary, the title company can issue an
endorsement identifying all changes to the Commitment.
Following are areas of concern to which your attention should be focused when
reviewing a title commitment:
1.
Documents. Require the title company to attach legible copies of all instruments
referred to in the Schedule 2, Section 2 Exceptions. All documents attached to the commitment
to support the exceptions must be reviewed carefully. If problems arise, they must be addressed
before closing within the timeframes required by the purchase agreement.
2.
Access. The title company must insure that the property has legal access to a
public road. The property may have physical access to a public road, but it may not have legal
access. There may be documents limiting access, and the title commitment should report the
existence of any such limitations. An example of a physical access without legal access is a
situation in which a gas pipeline easement abuts the road and the property, but the easement
prohibits roadways or driveways from crossing the easement area. A landlocked parcel must
have access through recorded easement access. If the public record discloses no such access, the
buyer must address that issue so that the property will be useful.
3.
Easements. All easement agreements listed in the commitment must be reviewed
carefully. Easements may also be created by a subdivision plat, if any, rather than by a separate
easement document. In that case, the plat must be reviewed to determine whether any terms
contained thereon affect the use of the property. If the commitment states that the policy will not
insure against claims by parties in possession, then the policy may not protect against an
unwritten or unrecorded easement. Further, easements may be written to affect the entire
property rather than just a portion thereof. Easements of this type are called “blanket”
easements, and may impair the development of the parcel. Blanket easements should be
modified to cover only the specific area actually used by the holder of the easements. For
example, there are many blanket easements for the drilling of gas and for the installation of gas
transmission lines in Northeastern Ohio. Gas companies benefited by the easements are willing
to modify them, at the property owner’s expense, to encumber only the actual location of the gas
line or the well, upon request of the property owner.
4.
Encroachments. A commitment may show an encroachment on the property,
such as a fence or protruding roof, or part of the property encroaching on neighboring
improvements. Such encroachments must be analyzed.
5.
Identity of current owner. Determine that the identity of the owner as set forth
on Schedule A is the same as set forth in the purchase agreement. If not, investigate the
inconsistency.
6.
Leases. A buyer should not accept a broad exception for rights of parties in
possession or for rights of tenants under unrecorded leases. If there are actual leases, the leases
should be listed specifically and should be reviewed. If the property is an apartment or
commercial office building, the buyer will be reviewing the leases as part of its due diligence. If
the property is other than the above, the buyer may not know of the existence of a lease unless a
memorandum of lease is recorded. It is possible that a lease will grant a tenant a right of first
refusal to purchase the property or some other provision that would affect the rights of the
current purchaser.
7.
Liens and taxes. If the commitment lists any liens affecting the property, then
the liens should be reviewed to determine if they are still in effect and can be satisfied at the
closing by the proceeds of the purchase price.
8.
Mineral interests. It is important to see whether mineral interests are severed
from the surface estate. It is common in some regions of Northeastern Ohio for the grantor of
property to reserve mineral interests in the property, in which case the fee owner of the surface of
the property might be permitted to construct improvements thereon, with the grantor retaining
the mineral interests reserving the right to drill below the surface of the property. These matters
must be analyzed to determine the risk to the buyer.
9.
Personal property. A title commitment does not address the status of title of
personal property located on the real property. If personal property is included in the real estate
transaction, a separate search of financing statements filed with the Secretary of State should be
made to determine whether there are any liens against the personal property.
10.
Restrictive covenants. The commitment should list any restrictive covenants
that are denominated as such or that are included in other documents such as previous deeds or
plat restrictions. For example, restrictive covenants (as well as zoning laws) may limit the size
or height of buildings, the use of buildings, or the minimum cost of construction of a building.
Restrictive covenants are common in industrial parks and are intrinsic in commercial
condominiums.
B.
Title Guaranty.
A title guaranty is also an indemnity contract whereby a title insurance company
guarantees that, so far as appears of record, the title to the subject real property is good in the
stated party subject only to the defects, liens, and encumbrances that are set forth in the title
guaranty policy. No coverage or protection is afforded against items or defects not revealed by
such an examination of the public records.
The insuring provisions of a title guaranty are in generally the following form: “Subject
to the exclusions from coverage, the exceptions contained in Schedule B and the provisions of
the conditions and stipulations hereof, Title Insurance Corporation, herein called the Company,
for valuable consideration, does hereby guarantee the party(ies) designated as Guaranteed on
Schedule A hereof, in an amount not to exceed the amount set forth in Schedule A hereof, have
good title to the land hereinafter described in Schedule A, at the date hereof, as appears from the
public records hereinafter defined, is vested of record as stated in Schedule A, subject only to the
mortgage(s), if any, therein set forth and to the liens, encumbrances and defects in title shown or
referred to in Schedule B”.
C.
Owner’s Policy of Title Insurance.
An Owner’s Policy of Title Insurance (Owner’s Policy) is an indemnity contract in
which the title insurance company guarantees that the title of an owner is good and is free from
defects, liens or encumbrances existing at the date of the policy, excepting those that are
specifically mentioned in Schedule B, Section 2 of the policy. The title insurance company is
obligated to defend the policyholder up to the full amount of the policy by reason of any defects,
liens or encumbrances found to exist at the time of the policy not excepted in the policy.
An insuring clause for an owner’s policy generally states the following: “Subject to the
exclusions from coverage, the exceptions from coverage contained in Schedule B and the
conditions and stipulations, Title Insurance Company, herein called the Company, insures, as of
date of policy shown in Schedule A, against loss or damage, not exceeding the amount of
insurance stated in Schedule A, sustained or incurred by the insured by reason of:
1. Title to the estate or interest described in Schedule A being vested other than as stated
therein;
2. Any defect in or lien or encumbrance on the title;
3. Unmarketability of the title;
4. Lack of right of access to and from the land.
The company will also pay the costs, attorney fees and expenses incurred in defense of the title,
as insured but only to the extent provided in the Conditions and Stipulations.”
An Owner’s Policy protects the property owner against any losses arising because of any
of the following: forged documents; false impersonations; mortgages cancelled by mistake;
undisclosed dower; undisclosed heirs or devisees; missing heirs presumed to be dead; deeds and
mortgages made by insane parties in which the insanity proceedings were not of record; deeds
and mortgages made by minors if there is nothing of record indicating the fact of minority;
undisclosed existence of children born or adopted after the execution of a will; release of dower
by a minor husband or wife where there is no record evidence of the minority; deeds made under
power of attorney that have been revoked by the death of the person executing the power;
divorce proceedings in a foreign county or state; foreign bankruptcy proceedings; probate of a
will after the deed is executed and delivered by the heirs; a recorded deed that was never
delivered; a deed delivered by an escrow agent in violation of instructions
D.
Loan Policy of Title Insurance.
A Loan Policy of Title Insurance insures a lender to the same degree as an owner’s policy
insures an owner.
A loan policy generally has the same insuring clause as an owner’s policy, except that the
following four matters or conditions are insured against:
1. The invalidity or unenforceability of the lien of the insured mortgage upon the title.
2. The priority of any lien or encumbrance over the lien of the insured mortgage;
3. Lack of priority of the lien of the insured mortgage over any statutory lien for services,
labor or material: (a) arising from an improvement or work related to the land which is
contracted for or commenced prior to Date of Policy; or (b) arising from an improvement
or work related to the land which is contracted for or commenced subsequent to Date of
Policy and which is financed in whole or in part by proceeds of the indebtedness secured
by the insured mortgage which at Date of Policy the insured has advanced or is obligated
to advance
4. The invalidity or unenforceability of any assignment of the insured mortgage, provided
the assignment is shown in Schedule A, or the failure of the assignment shown in
Schedule A to vest title to the insured mortgage in the named insured assignee free and
clear of all liens.
Leasehold Owner’s Policy; Leasehold Loan Policy.
A leasehold owner’s policy protects the lessee of a leasehold estate to the same degree as
an owner’s policy protects the owner of real estate, and the leasehold loan policy protects the
lender to a lessee of a leasehold.
E.
III. Policy Forms.
Most policy forms (known as “ALTA” forms) are those prepared by the American Land
Title Association which, starting in 1929, has sought to standardize title insurance policies. The
first policies standardized were loan policies, because lenders desired standard forms that did not
have to be negotiated. The ALTA adopted an owner’s policy in 1959, and in 1962 adopted new
uniform policies. In 1970, the ALTA adopted new forms of owner’s policies, Form A and Form
B. Form A did not insure as to unmarketability, and is no longer used. Form B insures as to
unmarketability of title, and is available in Ohio, if specifically requested.
Otherwise, the most current policies are the ALTA Owner’s Policy (10-17-92) and
ALTA Loan Policy (10-17-92). These policies narrowed the creditor’s rights exclusion available
on earlier policies. The 1970 Form B policy has a more favorable creditor’s rights exclusion,
and that is the reason it should be requested if available.
IV. Format of Policy.
Every title insurance policy is set forth in the following format:
1.
2.
Schedule A, containing the name of the insured; the estate or interest in land covered by
the policy; the identity of the person or entity in whom the estate in the land is vested;
and the legal description of the land.
Schedule B, containing the so-called General or Standard Exceptions and the Special
Exceptions. The General or Standard Exceptions are the following:
(a)
records;
Rights or claims of parties in possession not shown by the public
(b)
Encroachments, overlaps, boundary line disputes, and any other
matters which would be disclosed by an accurate survey and inspection of the
premises;
(c)
Easements or claims of easements not shown by the public records;
(d)
Any lien or right to a lien for services, labor or material heretofore
or hereafter furnished, imposed by law and not shown by the public records;
(e)
Taxes or special assessments which are not shown as existing liens
by the public records.
3.
Insuring provisions
4.
Exclusions from Coverage
The standard form policy contains the following exclusions:
(a)
Laws restricting, regulating, prohibiting or relating to occupancy, use or adjoinment of
the land; the character dimensions or locations of any improvements on the land;
separation and ownership or change in dimensions or area of the land; or environmental
protection or the effect of any violation of environmental laws; any governmental police
power not excluded by the above except to the extent that a notice of the exercise thereof
or notice of a defect, lien or encumbrance resulting from a violation or alleged violation
affecting the land has been recorded in the public records at the date of policy.
(b)
Rights of eminent domain unless the notice thereof has been recorded.
(c)
Defects, liens, encumbrances, adverse claims or other matters (a) created, suffered,
assumed or agreed to by the insured claimant; (b) not known to the company, not
recorded in the public records but known to the insured claimant and not disclosed in
writing to the company by the insured claimant prior to the date the insured claimant
became an insured under the policy; (c) resulting in no loss or damage to the insured
claimant; (d) attaching or created subsequent to the date of policy; or (e) resulting in loss
or damage which would not have been sustained if the insured claimant had paid value
for the estate or interest insured by the policy.
In addition to the foregoing, the following exclusions are contained in loan policies:
(d)
Unenforceability of the lien of the insured mortgage because of the inability or failure of
the insured at date of policy, or the inability or failure of any subsequent owner of the
indebtedness to comply with applicable doing-business laws of the state in which the land
is situated.
(e)
Invalidity or unenforceability of the lien of the insured mortgage, or claim thereof, which
arises out of the transaction evidenced by the insured mortgage and is based upon usury
or any consumer-credit protection or truth-in-lending law.
Any statutory lien for services, labor or materials arising from an improvement or work related to
the land which is contracted for and commenced subsequent to the date of policy and is not
financed in whole or in part by proceeds of the indebtedness secured by the insured mortgage
which at date of policy the insured has advanced or is obligated to advance.
The Special Exceptions include specific conditions of title such as specific mortgages,
assignments of leases and rents, plat conditions, restitutions, easements and specific tax and
assessment information.
5.
Conditions and Stipulations
Conditions and stipulations in a title insurance policy include matters such as a definition
of terms, manner and timing of delivery of notices given by a claimant, defense and prosecution
of actions and the duty of the claimant to cooperate, proof of loss, determination and extent of
liability, limitation of liability, reduction of insurance or termination of liability, subrogation,
payment of loss, and arbitration obligations.
V. Amendment to Policy Forms.
The standard form policies may be modified to provide additional coverages, or to delete
exclusions, by three methods: (1) Schedule B, Affirmative Insurance; (2) endorsement; or (3)
deletion of printed standard exceptions. The policies provide “extended coverage” if the more
common standard exceptions are deleted.
VI. Endorsements.
The standard form policy may be amended by endorsements, which also are printed on
standard forms. The following eight endorsements are the most commonly used:
1. Access: provides owner or lender assurance that land abuts and has access to a duly
dedicated public street
2. Comprehensive: provides owner or lender with protection as to private property
restrictions, building setback lines, and encroachments. It is designed to provide
comprehensive coverage in lieu of various individual affirmative coverages
3. Contiguity: provides owner or lender with assurances that parcels of land are contiguous
and, taken as a tract, constitute one parcel of land
4. Survey: provides owner or lender with assurances that the land described in the policy is
the same land described on a survey
5. Tax Parcel: provides owner or lender with assurances that no part of the land lies within
a tax parcel that includes property other than the land described in Schedule A
6. Variable Rates (Form 6.1): provides lender with insurance as to the validity,
enforceability, and priority of a mortgage that provides for variable interest rate
7. Zoning (3.0): provides owner or lender with assurance that vacant land is situated within
a designated zone classification and that a particular use is allowed under that
classification
8. Zoning (3.1): In addition to the coverage provided by the 3.0 zoning endorsement, the
3.1 zoning endorsement provides an owner or lender with insurance against loss
sustained by reason of a final court order that prohibits the use of the land for purposes
allowed by the zoning classification on the grounds that certain physical characteristics of
the land and structure located thereon violate the ordinances and require removal or
modification of the structure. Such physical characteristics include (i) area, width, or
depth of the land or building site for the structure; (ii) floor space area of the structure;
(iii) setback of the structure from the property lines of the land; (iv) height of the
structure; (v) number of parking spaces
The following is a non-exhaustive list of other endorsements available from title
companies. A number of form endorsements are attached on Annex 5.
1. Advances (future): insures lender for future advances during construction
2. Anti-Taint: provides affirmative insurance that the provisions of the mortgage securing
sums payable under a revolving loan do not affect the validity of the mortgage as security
for a term loan secured by the same instrument
3. Arbitration: modifies the arbitration provisions in an owner’s or loan policy to provide
that any controversy or claim between the insurer and the insured shall be submitted to
arbitration only if mutually agreed to by the party and the insured
4. Assignment of Policy: extends the date of policy to the date and time the assignment
from the original mortgagee to a third party is recorded; changes the name of the insured
to that of the assignee; and adds the recorded assignment to Schedule A of the policy
5. Co-Insurance: used when the insurer and another title insurance company co-insure the
interest in the land, with each title company issuing a title policy representing its
particular total amount of insurance
6. Condominium: used when the interest insured is a condominium unit
7. Creditor’s Rights: modifies the creditor’s rights Exclusion contained in the 1990 owner’s
and loan policies by limiting or deleting same
8. Doing Business: provides affirmative insurance to a lender which is a foreign
corporation doing business in the State of Ohio, of its right under Ohio law to enforce the
lien of the insured mortgage against the mortgage holder
9. EPA: used to protect against liens occurring due to violation of certain environmental
statutes
10. First Loss: provides lender with assurance that, in the event of a loss insured against
under the policy, the insurer’s liability will be determined without requiring the maturity
of the entire indebtedness and without requiring the insured to pursue its remedies against
any additional property securing the loan
11. Last Dollar: provides lender with affirmative assurance that payments made to reduce
the total loan indebtedness will not cause a proportionate reduction in the amount of
insurance as payments are made; that payments made will be applied first to reduce the
lien of the mortgage as it applies to collateral property; and that the insurance will remain
for the full amount until the last dollars are paid on the loan
12. Location: provides assurances to a lender and/or owner as to the accuracy of the survey
13. Mineral Rights: insures lender against loss sustained by reason of the future exercise of
any right to use the surface of the land for the extraction or development of minerals
excepted from the description of the land or excepted in Schedule B
14. Non-Imputation: provides protection to an owner or lender for matters that would
otherwise be excluded from coverage on the basis of imputed knowledge of the owner or
lender
15. Partnership and Limited Liability Company (Fairway): provides an insured partnership
with assurances that the company will not deny a claim under the policy due to the
admission or withdrawal of a partner, or the change of any partner’s interest in capital or
profits, subsequent to the date of policy
16. Reverter: provides an owner or lender with protection against loss resulting from a
violation of covenants, conditions, or restrictions providing for the right of reentry or
forfeiture
17. Revolving Credit: provides the lender with assurances as to the enforceability and priority
of its mortgage lien as security for revolving credit loan advances
18. Secondary Market: provides lender with limited assurances sufficient to allow the loan to
be sold in the secondary market
19. Shared Appreciation Mortgage: provides lender with assurances as to the enforceability
and priority of its mortgage lien as security for additional interest based upon the
appreciated value of the land
20. Subdivision: provides owner or lender with assurances that the land is lawfully
subdivided or platted and, as such, may be conveyed
21. Tax Foreclosure: provides owner or lender with assurances that an easement insured in
Schedule A of the policy will not be adversely affected by a tax foreclosure of the land
underlying the easement
22. Tie-In: provides assurances in large commercial transactions, where a single
indebtedness is often secured by multiple mortgages on multiple sites, that the separate
policies covering separate sites are tied in to the various policies issued as if they were
one policy
23. Truth in Lending: provides lender with protection against loss arising from right of
rescission conferred by the Federal Truth-In-Lending Act
24. Usury: provides a lender with protection against loss or damage sustained by reason of a
final judicial determination that the loan secured by the insured mortgage is usurious
25. Vehicular Access: provides an owner or lender with assurances that the land has
vehicular access to and from a dedicated public street through an appurtenant easement.
Each transaction must be evaluated to determine which, if any, endorsements are
desirable.
VII. Insured Closing Letters.
In many cases, real estate transactions are closed by agents of the title insurer, rather than
the title insurer itself. Owners and lenders must, from time to time, deposit large sums of money
with agents for disbursement at the closing of the transaction. Often the agent may not have
substantial assets of its own, and the risk exists that funds held by the agent may be lost through
the agent’s dishonesty, fraud, or failure to follow closing instructions. When owners or lenders
are wary of an agent’s solvency, they may wish to shift responsibility from the agent to the
(presumably) flush title insurer. Title insurers will issue “Insured Closing Letters,” sometimes
called Closing Protection Letters to overcome an owner’s or lender’s reluctance to place funds
with the agent. Insured Closing Letters indemnify the owner or lender, and in some cases the
buyer or seller, of the property, against loss because of fraud or dishonesty of the agent handling
the funds, or because of the agent’s failure to comply with closing instructions. An example of
the necessity of an Insured Closing Letter for the benefit of a seller arises when a substantial
disputed mechanic’s lien against the property is not resolved prior to closing, and both parties
wish to close a transaction notwithstanding the existence of the lien. The agent will agree to
issue good title to the buyer provided that the seller permit the agent to retain an agreed-upon
amount of funds to be held in escrow pending the resolution of the dispute over the lien. If the
agent handling the transaction is insubstantial or not well-known, it is not unusual for the seller
to request an Insured Closing Letter from the title insurer protecting the seller against any
malfeasance by the agent.
VIII. Mechanic’s Liens.
Mechanic’s liens cause frequent and serious problems for title insurers. In Ohio,
mechanic’s liens are perfected by filing for record a document known as an Affidavit for
Mechanic’s Lien. The priority of the lien dates from the time the first work is performed on the
project by anyone, not just the particular lien claimant. If work has commenced before the
issuance of a title policy, but the Affidavit for Mechanic’s Lien is filed after the date of the
issuance of the title policy, the title search will not disclose the existence of the mechanic’s lien
and the policy will not reflect the lien, even though the lien has priority over the interest insured
by the policy. One of the Standard Exceptions in a title insurance policy is the following: “Any
lien, or right to a lien for service, labor or material heretofore or hereafter furnished, imposed by
law and not shown by the public records.”
In the foregoing circumstances, therefore, the lien has priority over the insured mortgage,
a condition the lender cannot tolerate. To overcome that problem, title insurance companies will
provide insurance to a lender based upon priority of the mortgage over subsequently recorded
mechanic’s liens, because state law requirements are met (state law may provide that the
construction mortgage have priority unless a Notice of Commencement is recorded before the
mortgage, or a mechanic’s lien is recorded before the mortgage, or visible commencement of
construction occurs before the mortgage is recorded).
In some cases, a title insurer will provide a lender coverage against loss of priority by
evaluating issues such as the value of an indemnity from the developer to the title insurer,
financial review of developer, status of leases, construction contract and budget, equity in the
land, procedure for disbursement and amount of disbursements.
Even if the title policy provides mechanic’s lien coverage, an issue still might arise
precluding coverage to an owner or lender. For example, Exclusion 3(A) excludes the title
insurer’s liability arising from claims “created, suffered, assumed or agreed to by the insured
claimant.” If the insured fails to disburse or makes an error in its disbursement procedure,
causing the lien to be superior to the mortgage, then the insured would not be covered by the
policy.
IX.
Survey.
A survey is the measurement of boundaries of a parcel of land and other conditions, such
as easements, affecting the land. The “survey plat” or “plat of survey” is the actual drawing
prepared based upon the measurements. If the property is within a recorded subdivision, it can
legally described by the name assigned to it in the recorded subdivision plat. For example, “Lot
10 in the Creekside Ridge Subdivision as shown in plat recorded as Instrument Number
2000123456 of Cuyahoga County Official Records.” If the property is not included in a
recorded subdivision [;at, the property will require a narrative description of the boundary using
courses, distances, and references to natural or artificial monuments, or a “metes and bounds
description.”
A boundary survey measures only the boundary of property. More often than not, a more
comprehensive survey is required.
The American Land Title Association, in connection with the American Congress on
Surveying and Mapping and the National Society of Professional Surveyors, has developed
“minimum standard detail requirements” that apply to land surveys in states in which ALTA
forms are used, such as Ohio. Such surveys are referred to as ALTA or ALTA/ACSM surveys,
and are generally required when a lending institution is involved in a substantial transaction.
A survey can confirm the boundaries and other characteristics of the property, such as
easements, improvements, waterways, and flood zones, that otherwise can only be estimated. In
many cases a survey is essential to a transaction. For example, if the final purchase price of a
vacant tract is based upon a specific dollar amount per acre, both parties (and the bank) would
benefit from a survey, and, in that situation, at least a boundary survey would be necessary.
Also, in states such as Ohio, in which title commitments exclude from coverage discrepancy or
conflicts in boundary lines or encroachments or protrusions of improvements, a survey is needed
to confirm that no such problems exist so that the title policy may be issued without that
exclusion.
The important matters to be considered when reviewing the survey are similar to those
which should be considered when reviewing a title commitment.
1.
Access. The survey should show that the property has access to a public road.
Do not assume, however, that the property has legal access even though the property abuts the
public road. See section on Title Commitments.
2.
Adjoining property. It is sometimes desirable to show adjoining property on the
survey to be certain that there are no gores between the surveyed property and the adjacent
property. (A gore is a small parcel of land, usually triangular in shape, resulting from the failure
of a legal description(s) to join the two tracts of land.) The recording information for the deed of
the adjoining owner should be shown on the plat.
3.
Surveyor’s certificate. A surveyor’s certificate defines the scope and extent of
the work and constitutes a representation by the surveyor of the matters stated in the certificate.
Most lending institutions have a required form of certificate that should be part of the survey,
and it is similar in scope and form to the basic ALTA/ACSM certificate. The surveyor usually is
required to certify the accuracy of the survey to the new owner, its lender, and the title insurance
company (and the attorneys representing the new owners).
4.
Compliance with Restrictions, Ordinances, and Building Requirements. The
survey will show dimensions of any improvements in relation to the property as a whole so that
the buyer can determine whether any improvements violate zoning requirements such as front
yard, side yard, back yard, height, and mass requirements.
5.
Easements and other matters. All easements, building lines, restrictions, and all
other matters in the title commitment that can be shown on a survey plat should be depicted on
the plat. The plat should also show evidence of rights of parties in possession not evidenced by
recorded documents but which can be observed by physical inspection of the property. All
offsite easements that affect the use of the land, such as access and drainage easements, should
be shown on the plat.
6.
Flood plain. The plat must show whether any portion of the property is in the
flood plain, and the certification should identify the flood plain map used as the basis for that
conclusion and state the type of flood hazard area located on the property.
7.
General matters. The plat should be dated to show that it is current. There
should be a legend showing the types of symbols used by the surveyor. The plat should show the
property’s street address and area in terms of acres.
8.
Improvements. Existing improvements, including parking areas (with striping if
applicable), sidewalks, buildings, etc., should be shown on the plat. If construction is planned,
the plat should show the proposed location of the improvements.
9.
Metes and bounds description. The course and distance calls on the survey plat
should exactly match those stated on the metes and bounds description prepared by the surveyor
ad which will also be shown on the plat. They should substantially conform to the property
description contained in prior deeds and other conveyances. The legal description on the survey
must be identical to that set forth in the title commitment. If it is not identical, the attorney must
contact the title company and the surveyor to ensure that they communicate in order to modify
the legal description as necessary.
10.
Utilities. Utilities include water, wastewater, storm drainage, natural gas,
electricity, telephone, telecommunication, and cable service. The location of all utilities serving
the property should be located on the plat. A utility line running along the boundary of the land
or across the land does not necessarily mean that the owner or occupant has the right to tap into
that line. The availability and adequacy of utilities to the property should be investigated.
THIS ARTICLE IS PRESENTED FOR INFORMATIONAL AND EDUCATIONAL
PURPOSES ONLY. IT IS NOT LEGAL OR TAX ADVICE. PLEASE REVIEW YOUR
SPECIFIC QUESTIONS TO A QUALIFIED LEGAL AND TAX ADVISOR.