Credit Crunch Got You Down? - Now is the Time to “Get Back Up” and Buy, Creatively.

The “Bad and the Ugly”. Real Estate doom and gloom reports have been surrounding us for over a year now. The residential market continues to suffer, as the July, 2008 Ohio Association of Realtors study reported that Ohio’s residential sales activity mirrored the national sales decline of more than 13% during the past year. To make matters worse, the gloomy residential real estate picture has now been overshadowed by an even gloomier commercial real estate picture. In the August 25, 2008 issue of Crain’s Cleveland Business, Stan Bullard’s article, “Unhappy Anniversary” reports that on the one year anniversary of the “credit crunch” (August, 2008), commercial property sales in Northeast Ohio are down 57%. The Real Capital Analytics of New York study cited in Crain’s shows a similar downturn of commercial real estate sales, on a nationwide basis, of 59%.

Most trace the real estate industry’s problems to the vanishing act of the publicly traded mortgage securities market and big loan losses at banks across the Country. Real estate investors and developers from mom-and-pop shops to major REITs are all reporting that securing a commercial real estate loan today is: 1) more difficult (with increased loan documentation), 2) more expensive (with the cost of funds and fees magnified), and 3) less leveraged (equity requirements on commercial deals now range from 20% to 50%).

The “Good”. So, what to do? The easy answer for buyers is: buy. Now is the opportune time. Alex Pacella (Vice President at NAI Daus) reported in the August 25th Crain’s Article referenced above that: “A year and a half ago there were three or four buyers for every [commercial] property…now for every three or four properties there is one buyer”. Residentially, the Ohio and National Association of Realtors reported, in its July, 2008 study, that the median price for existing homes is down 7.1% from a year ago. Finally, we are told that the Federal Reserve Board is expected to increase the federal funds rate at its next meeting. In other words, it is time to be reminded that the nature of real estate is cyclical (always has been, and always will be); and when inventory is high and prices are low, we are at the bottom of a cycle. In fact, hopefully we are on the upswing, as existing home sales actually rose 3.1% from June to July of 2008.

So, get back in the “game” before we are again faced with a “limited schedule” and a “high price of admission”.

The “How to”. How to buy, when we seem to be in the worst credit crunch since the S&L crisis? The simple answer to this seemingly difficult question is: get creative again, with “Creative Financing”. “Creative Financing” is the term that has been widely used to refer to non-traditional means of real estate financing or financing techniques not commonly used. The following presents a summary of the more common, creative approaches you may want to consider for your next deal:

1. Seller Financing - What better way to double the interest you could otherwise earn today in a CD or money market account, than by taking back a mortgage on the property you are selling. Offering seller financing to your buyer may also help you justify a realistic (vs. a “fire sale”) sales price. A good team consisting of a real estate attorney, real estate broker and seller can seamlessly make a seller-financed deal a quicker, easier and less expensive process than associated with commercial lenders. A credit check and reasonable down-payment can help lower the risk.

2. Installment Sale (aka Land Installment Contract) - If a buyer cannot afford a sizable down-payment and/or the seller prefers additional security and flexibility, this type of deal can work extremely well. Under a typical installment contract, the buyer takes immediate possession, however, the seller retains legal title until the contract has been performed and the price has been paid in periodic installments. If the buyer defaults (for property improved by a dwelling) prior to paying 20% of the purchase price, or prior to making payments for 5 years, the seller is more akin to a landlord and will have, pursuant to Ohio law, an easier time retrieving possession of the property and evicting the “vendee” from the premises. (See Chapter 5313 of the Ohio Revised Code).

3. Contingency Sales - Contingency sales are nothing earth-shattering, nor new, but the expanded use of same in a purchase agreement can help a buyer afford to buy. Financing contingencies are the most widely utilized, however, they are often poorly drafted. Buyers should tailor-make the contingency to incorporate the financing it can afford in terms of the percentage of equity required, and interest rate and fees charged. Sellers can ensure that the deal will happen irrespective of the financing contingency by providing that if the commercial lender fails to meet the buyer’s terms, the seller will do so.

In residential transactions, buyers who will not be able to afford to buy a new house until their existing house is sold should insist upon a “sale of existing home contingency”. Traditionally, these contingencies have not been acceptable to sellers. However, this can be fairly remedied by giving the seller the right to continue to market the property and seek secondary deals. As a variation on this theme, an obligation to “put” to the buyer, the obligation to buy within thirty days of seller receiving a secondary offer (or relinquish the contingency) would then prevent the seller from losing a sale while the buyer is trying to sell its property.

In commercial transactions, multiple contingencies are customarily provided, unless the deal is a below market, “as-is” deal. Again, when representing the buyer, simply add what is needed to make the deal work financially (e.g., pre-sales, signed lease by anchor tenant, re-zoning). Unless the property can easily be sold without contingencies, most sellers will “go along for the ride”, provided they are compensated by buyer putting more “up front money” at risk.

4. Lease - Option/Rent-to-Own - Lease-options have been traditionally used in commercial deals to give the tenant the option to buy, after the expiration of a long-term lease. For a seller that needs an income stream now, and a buyer having trouble securing financing, however, the lease-option can just as easily be used on a short-term basis. Again, rights to market the property during the duration of the option, and “put options” can be utilized to balance the needs and risks of the parties.

The “rent-to-own” form of lease-option used in the residential market has expanded over the years, and may be a good vehicle for a buyer who cannot qualify for traditional financing. These deals must be carefully scrutinized, however, because rent-to-own tenants are often obligated to pay an option fee, and a premium above market rents. However, because sales and option prices are still low, the bottom line numbers may balance favorably to the buyer who cannot qualify for conventional financing.

Sellers of large parcels of land should consider “rolling options”, or staged purchase deals, allowing the buyer-developer to buy the acreage in phases, rather than all at once. If a seller, for example, gives the buyer three (3) successive options to buy a thirty (30) acre property in three (3), ten (10) acre parcels, he/she might indeed, be left with 20 out of the 30 acres. However, the buyer in these types of deals will often have the right (or obligation) to make the overall, infrastructure improvements. Once these improvements are completed, the seller will have an easier time selling the remaining acreage to another buyer.

5. Bring in partners - True, a buyer would have to share the wealth and divide the “gold”, however, they would also be able to divide the cost of “prospecting”. We have put together many deals (typically, in limited liability company arrangements) consisting of real estate investors willing to work together, rather than bid against each other for a particular piece of income-producing property.

Private placement equity financing is also a very viable option. We recently handled a transaction whereby physician “tenants” in our client’s to be purchased office building also became equity holders in the property. The equity supplied by the investor-tenants financed the deal for our client, and gave the physicians “a piece of the rock” instead of just a rent obligation every month.

6. Hedge Funds - The Wall Street Journal recently reported (in an August 27, 2008 article by Ling Ling Wei) that investors seeking financing to acquire office towers, retail stores, hotels and other commercial property have been looking to the approximately 140 hedge funds that specialize not only in stressed assets and fixed income securities, but also provide commercial real estate lending. While the interest rate charged by these funds can be twice that charged by a conventional lender, these hedge fund loans have been reported to be worth the extra loan costs to avoid missing out on golden, income producing real estate opportunities. These loans are typically short-term (one to two years) and the properties securing the loans must have enough cash flow to cover debt payments and low loan to value ratios. Nevertheless, these hedge fund loans are being more and more looked at to “bridge the gap” during the credit crunch, much like construction loans bridge the gap until construction is complete and constructed buildings become income-producing assets. The Wall Street Journal article can be found at the following Site:

The “real estate opportunity glass” is definitely half-full, and hopefully on its way to filling up fast. Conservative wisdom says “wait out the storm”. Conventional real estate wisdom, however, says “answer the door when opportunity knocks”. Now is the time to “answer the door” and buy, creatively.

New Real Estate Sites Worth Seeing


The Cuyahoga County engineer recently established the Cuyahoga County Enterprise Geographic Information System (“CEGIS”). CEGIS is a state of the art, on‐line mapping and information system that has been in place in many other counties in Ohio.
The Site is still in its test environment or “PRE‐RELEASE” Beta version. The County reports that this process will allow residents to preview this site, provide feedback and suggest enhancements. Until full release, however, minor glitches can be expected.


This Site is the National Association of Realtors’ new website that includes a database of commercial property listings, industry news and events, research data and feature articles. The Site should prove helpful and insightful to commercial brokers, as well as real estate investors.


Supercharge your legal research by attending LexisNexis® Coffee Break Webinars. They're fast, effective and best of all-they're free! Choose from a menu of quick 20-minute sessions and discover new tools and techniques to help make your research more efficient and cost-effective.

In September, check out the following Real Estate Webinar:

What: Lexis® Transactional Advisor Real Estate Practice Center Coffee Break Webinar—The Hot Properties of LexisNexis Real Estate Solutions : (Lexis Transactional Advisor Real Estate Practice Center, Real Estate Area of Law Page and Real Estate Law Center)

When: Thursday, September 18, 3:00 P.M. EST

Cost: $0; (but you must register on the website)

Ohio Groups Fighting Foreclosure Receive Funding

State Law Matters A group of 11 nonprofit organizations have received an additional $1 million from the State of Ohio to help fight off foreclosure. The organizations have so far helped 515 low-income and middle class families in their homes by providing no-interest loans from $3,000 to $5,000.

The funding was provided by the state's Office of Housing and Communit Partnerships, and is a bright spot in a state that is one of the hardest hit in the mortgage foreclosure crises.

Original news posting found on (2 on your side--Dayton); provided by MortgageWatch Newsletter, a free daily email newsletter.

Authority of Municipalities to Require Annexation as a Condition to the Provision of Sewer and Water Services to Nonresidents

real estate 101Council for the City of Canton, Ohio has adopted legislation requiring prospective or existing extraterritorial customers of City water and sewer services to annex or agree to be annexed into the City and authorizing City’s Director of Public Service to withdraw and terminate water and/or sewer services, upon reasonable notice, if those extraterritorial customers fail, neglect or refuse to be annexed. The annexation requirement applies both to the extension and continued use of water or sewer system service as follows:

• As one of the written terms and conditions for the extension of the City’s water or sewer system service, all extraterritorial customers must agree to be immediately annexed or agree to grant an irrevocable power of attorney to the City consenting to annexation at a future time at which the City determines annexation is feasible.

• As a condition of continued service of the City’s water or sewer system service, all current extraterritorial customers whose property is currently contiguous of the existing City boundaries or which becomes contiguous to the City boundaries must agree to be annexed to the City if requested by the City’s Director of Public Service. The Director must determine a reasonable period of time, no less than 90 days, during which the customer must provide written consent to the annexation or face termination of service.

The resolution provides that the City previously determined to use its power of annexation to achieve organized growth and economic development. The resolution also authorizes the Director to enter into agreements with affected political subdivisions when in the best interests of the City and its inhabitants.

Council adopted this resolution under Article XVIII, Section 6 of the Ohio Constitution, which generally allows, with certain limitations, any municipality owning or operating a public utility to sell surplus water or sewer services outside its territorial boundaries. Municipalities have substantial authority and discretion under this provision, as demonstrated by several court decisions.

A municipality’s authority to acquire, construct, own, and operate a public utility within or outside of its corporate limits is derived from Article XVIII, Sections 4 and 6 of the Ohio Constitution. The State generally cannot limit or restrict this power by requiring the municipality to supply services outside its corporate limits.

A municipality has the complete authority to determine the policy to be followed regarding the sale and delivery to others of a surplus product of a municipality-owned utility. The municipality is not required to supply all those who demand the surplus, but may sell and dispose of its surplus product in those quantities and in that manner as the municipality’s council determines to be in the best interest of the municipality and its inhabitants. Municipally owned public utilities have no duty to sell their products to extraterritorial purchasers absent a contractual obligation. If a municipality limits the scope and extent of its duty through contract, the municipality is bound to supply services to extraterritorial customers in accordance with its contract and without discrimination. However, the municipality is not bound to continue to supply the service to those extraterritorial customers after the contract expires. In those circumstances where there is a contract between the extraterritorial customer and the municipality but the contract provides no termination date, either party may terminate the agreement upon reasonable notice. Accordingly, a municipality has the authority to determine whether to sell its utility services to extraterritorial customers and does not assume a duty to continue supplying utility service in perpetuity to extraterritorial customers merely by virtue of having once agreed to supply it.

A municipality may require annexation prior to the extension of utility service to extraterritorial customers. In 2006, the Ohio Supreme Court considered, in the sale and delivery to extraterritorial customers of the surplus product of a municipally owned public utility, the power of council of a municipality to determine the terms on which the product will be sold. The Court held that a municipality may, through either a written agreement or by ordinance, require extraterritorial water and sewer customers to annex their property to the municipality or be subject to termination of their utility service. The municipality’s council has the sole authority to determine policy relative to the provision of these services.

balancing interests
Case law has also considered whether municipal ordinances imposing conditions on continued utility service to extraterritorial customers are constitutional and therefore enforceable. These ordinances are considered actions by a municipality in the exercise of its police power. To be enforceable, each condition under these ordinances must not be unreasonable, arbitrary or capricious and must bear a rational relationship to the health, safety and welfare of its citizens. Legitimate reasons for requiring annexation as a condition of receiving utility service have included each of the following:

• Regulating municipal growth.

• Increasing the municipality’s tax base, resulting in increased tax revenues.

• Reducing the strain on municipal services caused by adjacent extraterritorial urbanized areas.

• Benefitting extraterritorial residents by providing better and more cost-effective services such as parks, recreation, and police and fire services to those residents.

• Protecting a limited resource by studying the growing needs of all of its customers to ensure adequate service.

• Protecting against uncoordinated, uninvited growth around the municipality, resulting in loss of tax base and inability to properly fund existing or future municipal services.

• Protecting public health by acting to rid of septic systems from adjoin lands by requiring homeowners to connect to the public sewer system.

As a limitation on this municipal authority, one court has held that annexation covenants were unenforceable when, at the time the municipality required annexation covenants in exchange for sewer services, the municipality already had an unconditional contractual duty to provide sewer services to extraterritorial property owners. In this case, the municipality had contracted with a county to provide certain utility services originating in a designated area. The court held that the extraterritorial property owners were third-party beneficiaries to the contract and the municipality could not condition the extension of utility services to the extraterritorial property owners on the signing of an annexation covenant.

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WATCH YOUR LANGUAGE AND DO THE (RIGHT) DEED (If the Form Does Not Fit, You Must Alter It #3)

Other than the Purchase and Sale Agreement, the Deed is the most important and often misunderstood document utilized in a real estate transaction. Like a Certificate of Title for an automobile, the Deed is the document that actually transfers the title of real estate from one to another. Unlike a Certificate of Title for an automobile, however, a Deed comes in many forms, and often contains built-in warranties regarding the state of title. Often, as is the case in Ohio, the warranties in a Deed may be “hidden” by use of abbreviated terms (e.g. “General Warranty Covenants”; See Ohio Revised Code Sections 5302.05 - .11).

Examples of deed warranties include the warrant (i.e., promise-guaranty) that: the seller owns the property and has the right to convey it; that there are no liens against the property unless otherwise stated; and that the buyer will receive possession free from court actions or other interference by others. The largest mistakes we see regarding deeds are: (1) accepting one deed vs. another without knowing the difference; (2) failing to exclude certain matters from the warranty; and (3) not understanding the “doctrine of merger”, which has the potential of nullifying purchase and sale agreement language regarding title that does not get properly translated into the deed. Especially in residential transactions, many Buyers simply agree to accept the deed at closing, upon the mistaken belief that its contents are “standard boiler plate” and the form is simply a formality. As discussed in previous “Watch Your Language” posts to this Blog, the language in a real estate contract and deed should be as unique as the unique parcel of real estate being purchased. If you don’t review and negotiate bothersome language, you will indeed be formally stuck with the form you signed. Before you review and negotiate, however, you should have a basic understanding of the types of deeds commonly utilized.

The basic types of deeds in use in Ohio are as follows:

General Warranty Deed: A General Warranty Deed is the most common form of deed in Ohio and provides the greatest protection. In this Deed, the Grantor warrants that it lawfully owns the property; that title is free and clear of all liens and encumbrances (except as may otherwise be stated in the Deed); that the Grantor has the unrestricted right to sell the property and that the Grantor will protect and defend the title for the Grantee from any claims arising from any persons. In Ohio, the statutory phrase “___ Grants, with General Warranty Covenants” is the magical phrase used to convey a deed with the above-described warranties. It is important to note that the warranties (covenants) in General Warranty Deeds are not limited to matters that occurred during the time that the Grantor owned the property; rather, the Grantor is effectively defending title against him or herself and all those who previously held title to the property.

Limited Warranty Deed: In a Limited Warranty Deed, the Grantor is only warranting title as to the period of time that he or she held title, and is not responsible for title matters that occurred previous to the Grantor’s acquisition of the property. A seller of property that does not have title insurance, or is not otherwise in a position to make warranties as to the entire history of title, should use a Limited Warranty Deed. In commercial transactions, Limited Warranty Deeds are utilized more often, especially when the deal is a below market, “as is” deal. The Limited Warranty Deed is also utilized more so in parts of the State that typically relies on title insurance for protection vs. title abstracts and opinions. In Ohio, the words “___Grants, with Limited Warranty Covenants…” will supply the statutory language to transfer a property by Limited Warranty Deed.

Quit Claim Deed: With a Quit Claim Deed, the Grantor conveys whatever interest they have in a property (if any), without any warranty whatsoever. Accordingly, if the Grantor has no interest in the property to transfer; the Grantee will not receive any interest. Quit Claim Deeds are typically used in transactions to clear up previous errors in the chain of title, or for transfers between family members.

Special Purpose Deeds: There are particular situations that call for transfers of property apart from those described above. For these situations, “Special Purpose Deeds” are utilized, and include: the Sheriff’s Deed (used in foreclosure), Executor’s Deed (used in Probate Court) and Trustee’s Deed (used in bankruptcy). With these types of Deeds, the only warranties are that the transferor has been duly appointed to transfer the property and that all necessary legal proceedings prior to transfer have been completed to permit the transfer.

Survivorship Deed: This Deed is somewhat of a misnomer, because the magical language used for a Survivorship Deed simply describes how two or more persons are acquiring title, and what automatically happens to one joint owner, upon the death of the other. The typical language to establish joint tenancy is “to _____ and _____ for their joint lives, remainder to the survivor of them”. Upon death of one of the joint tenants, their undivided interest automatically passes to the surviving joint tenant, without need for probate. Typically, the “Survivorship Deed forms” contain blanks for “covenants, if any”. These blanks are often overlooked, but it is crucial that they be filled in. Without inserting, for example, “with General (or Limited) Warranty Covenants” in the survivorship deed form, no warranties of title will be made.

Transfer on Death Deed: Even more of a misnomer than the Survivorship Deed, the Transfer on Death Deed transfers no interest in property when signed and filed. The Transfer on Death Deed is analogous to signing signature cards for a bank account, and naming a beneficiary (except the Deed is filed and recorded). During the person’s life, the beneficiary has no right or interest to the asset, but upon death, the asset will immediately transfer to the beneficiary, without need for probate.

The following “practice pointers” are provided to help you “watch your language” with deeds:

1) Review the deed before closing.
If you are the buyer (or represent the buyer), either have the seller: a) attach the deed form as an exhibit to the purchase and sale agreement; or b) put a provision in the agreement requiring: i) Seller to provide Buyer with a copy of the proposed deed, a few days prior to closing; and ii) Buyer’s reasonable approval of the deed form. Using language in the purchase agreement specifically describing the type of the deed and the title it will transfer (and making Seller’s compliance a condition to Buyer closing the deal) will also limit the potential of being unpleasantly surprised with a different deed at closing, than expected;

2) Do the (right) deed. Commercial sellers often feel they should not have to “underwrite” the title insurance company, and want to issue a Limited vs. General Warranty Deed. The need for a Limited vs. General Warranty Deed (from the seller’s standpoint) is magnified when the seller has no title insurance, or has only held the property for a short period of time. If the buyer can get a good title insurance policy, the issue is minimized. However, as with any insurance policy, there are limitations and exceptions. Accordingly, buyers accepting Limited Warranty Deeds should ensure that the title company’s “standard exceptions” are deleted, get “gap coverage” and consider appropriate endorsements as the buyer will have no recourse against the seller for title problems caused prior to their seller’s ownership.

In residential deals, we often see buyers enamored with survivorship deeds to “avoid probate”. The problem, however, is tax and liability issues could vastly exceed probate costs. Legal counsel should be consulted to see if a limited liability company, trust, or other “ownership vehicle” makes more sense than a joint tenancy with survivorship rights.

3) Use the right magic (statutory) language. Sections 5302.05 - .11 of the Ohio Revised Code sets forth deed forms and the correct, statutory language. Archaic language can be utilized, but following the statutory words “with General Warranty Covenants”, for example, ensures that the buyer will receive exactly that, and nothing less.

4) Don’t forget the exceptions. Warranty Deeds typically have a “subject to clause”, excepting matters such as zoning ordinances, taxes and assessments not yet due and payable, certain matters (or all matters) of record and survey matters. If you are selling, and don’t have a “subject to clause”, you are in effect, promising clear title with no encumbrances whatsoever. If you are buying, and the “subject to clause” states “subject to state of facts an accurate survey would show”, you have just accepted any encroachments onto your property. The obvious buyer protection here is to get a survey, and a right to walk away from the deal if the survey shows material encroachments…

Do you really need to worry about the deed, if the purchase agreement spells out what deed you are to get? As Reagan used to say to Russia, “trust but verify”! This is especially true in real estate law due to the “Doctrine of Merger”. While coverage of this issue is a blog article in and of itself, suffice to say that as a general rule, if the deed transfers a different title than what is called for in the purchase agreement, and there is no fraud or mutual mistake involved, and no “survival clause” (clause stating that all covenants in the contract survive the filing of the deed), the buyer gets what the deed gave him/her, not what the contract promised. The disgruntled property buyer (or seller) in this situation has no legal grounds to insist that the other party accept changes to the deed after it is filed.

The moral of this story? Watch your language and do the (right) deed. If the form does not fit, you must alter it…before closing.

CLE UPDATE- 4th Annual Cleveland Land Development Conference

The Real Estate Communications Group and Midwest Real Estate News will be presenting the 4th Annual Cleveland Land Development Conference on Wednesday, September 17, 2008 at the Embassy Suites Cleveland-Rockside. This event promises to be one of Northeast Ohio's biggest real estate networking opportunity with over 350 industry leaders and professionals expected to attend.


Public/Private Partnerships in Urban Environments
Health care: Financial Strategies When Investing in Real Estate
Legal Update on Real Estate Trends
Tax Update for Real Estate and Construction
Green Strategies & Trends

PRICE: $120 if registered prior to September 9, 2008; $149 thereafter

or call 888.516.7939 for more information

Ohio Supreme Court Rules that Possession of Another's Property by Mistake, Still "Adverse" Possession

The Supreme Court of Ohio ruled yesterday in Evanich v Bridge (Slip Opinion No. 2008-Ohio-3820) that subjective intent of one party to acquire property of another is not required to prevail on an adverse possession claim; rather, the claimant must show by clear and convincing evidence that he possessed the disputed property and treated it as his own for a period of 21 years. The Court’s ruling was a 7-0 decision.

Facts of the Case: The case involved a dispute over ownership of a small strip of land that forms the boundary between two residential lots in Elyria. The Evaniches installed a border of fencing, railroad ties and landscaping on their (according to the Evaniches) side of what they believed was the property line, unaware that these materials actually encroached on the neighboring parcel. A house was later built on the neighboring parcel. Ten years later, the Bridges purchased and moved into that neighboring lot. The two families continued to occupy their homes for the next 25 years without discovering the encroachment. Then, the Bridges had their land surveyed and discovered that the Evaniches' fencing and plant beds encroached onto the Bridges’ property. The Bridges then asked the Evaniches to relocate the encroaching materials. Instead, the Evaniches filed a court action seeking a declaration that the Evaniches had acquired legal ownership of the disputed land through adverse possession.

Case History: The Lorain County Court of Common Pleas granted the Evaniches’ adverse possession claim and the 9th District Court of Appeals affirmed the lower court’s ruling. The Bridges then appealed to the Ohio Supreme Court.

The Court's Reasoning: The Ohio Supreme Court ruled that it did not matter whether the Evaniches intended all along to use the additional property as their own or whether construction of the fencing and landscaping beyond their own property was a mistake. The court stated: “We have never held that a claimant must establish subjective intent to acquire title to real property of another to prevail on an adverse possession claim.” The Evaniches testified that it was in fact a mistake, and they would never have planted and fenced where they did, had they known that property belonged to their neighbor.

The Court cited over 100 year old case law to reiterate the classic elements (that need to be proven to prevail upon a claim) of Adverse possession, that those who went to law school know by the acronym "OCEAN". In other words, to acquire title to property by adverse possession, the use, for 21 years or more must be Open; Continuous; Exclusive; Adverse and Notorious. The Court clarified that to prove adverse use, intent still must be shown, but only the intent to occupy and treat property as one’s own, not the motive or intent to take the property of another away. Objective not subjective intent is all than has been needed to prove the adverse element of adverse possession for 140 years, the Court reasoned, and consequently, they were (as stated by the Court) “unwilling to alter a rule that has successfully directed the application of the doctrine of adverse possession for so long”.

To Re-prorate Or Not To Re-prorate (Real Property Taxes); That Is The Question

The answer: it depends on whether you are the buyer or the seller, and whether the purchase price is higher or lower than the taxable value of the property at transfer.

Background: By way of background, proration and re-proration are concepts necessary in the transfer of real estate in Ohio, because real estate taxes are paid “in arrears.” In other words, the bills that were sent out in June, 2008 were actually for July through December of 2007 taxes, and the bills that come out in December, 2008, will be for January through June of 2008 taxes. Because Ohio real estate taxes may be paid in two, six-month installments, they are said to be “six months in arrears”. Paying real estate taxes in arrears is a concept that many states initiated during the Depression, when many could not afford to pay their property taxes when actually incurred.

Proration 101: Because of the payment in arrears phenomenon, the taxpayer is, in effect, paying taxes based on a non-current valuation of their property. Nonetheless, most real estate contracts contain a clause to the effect that “real estate taxes and assessments shall be prorated based on the latest available tax duplicate”. This proration language translates to mean that the amount owed by the seller for taxes between the last tax bill paid and the transfer date will be credited to buyer at closing, so when the next bill comes to the buyer after closing, the buyer will have been paid for the period of time that seller owned the property. The above-described method is sometimes called the “short proration” method. Some counties in Ohio, unless specified in the contract otherwise, traditionally use the “long proration method.” In that method, the entire first tax bill that will be due after the closing date is paid by the seller at closing, and then the second six-month bill due after the closing date is prorated, just as in the short proration method.

The problem with prorating taxes that are paid in arrears is that the valuation that comes out in subsequent tax bills, may be more or less than the “latest available” tax duplicate at the time of closing. When the tax bill is sent to the buyer after closing, if the valuation (and resulting taxes) is higher than the valuation used as a base at closing to prorate the taxes, the buyer will be paying for the increase in taxes, for the time the seller owned the property. While this is unfair to the buyer, the buyer can do nothing about it unless there is a “re-proration clause” in the buyer’s contract, allowing the buyer to go back to the seller for its prorata share of such increase in the taxes.

Should buyers, then, always insist on a re-proration clause? The answer is no, because if the tax bill after closing has a lower valuation than the one available at closing, the buyer would have to pay back to the seller, the buyer’s windfall resulting from a higher than actual valuation for the time period seller owned the property.

So, when should you provide for a re-proration clause, when you don’t have a crystal ball as to whether the property will increase or decrease in valuation? One easy rule of thumb is to look at the valuation called for in the latest available tax bill, and compare same to the purchase price. If the purchase price is higher than the current valuation, and you are (or represent) the buyer, you want a re-proration clause. If the purchase price is lower than the valuation displayed on the tax bill at the closing, and you are (or represent)the buyer, you won’t want a re-proration clause. Sellers in the above examples will want the opposite.

The "crystal ball" for the above referenced rule of thumb is the Ohio Supreme Court’s ruling in Berea Bd. of Edn. v Cuyahoga Cty Bd. of Revision, 23 Ohio St. 3d 59 (2005). In the Berea case, the Court ruled that "when [a] property has been the subject of a recent arm's length sale between a willing seller and a willing buyer, the sale price of the property shall be the 'true value for tax purposes'. As a result of that ruling, counties traditionally will increase the valuation after a sale higher than the previous valuation. While counties may not decrease their valuation if a purchase price is lower than the previous valuation, the taxpayer may petition the County for a tax refund, and should ultimately prevail if the "Berea test" is met. Since sellers will no longer own the property after closing, however, sellers (or those representing sellers) will want to insist upon a clause in their purchase agreement that not only allows for a re-proration (when the purchase price is lower than the valuation at closing), but creates an obligation of the buyer to file (and a right of the seller to join with the buyer in) an action to reduce taxes.

The bottom line on re-proration is that buyers should consider a re-proration clause when the purchase price exceeds the County’s valuation at closing, and sellers should consider negotiating for a re-proration clause when the purchase price is lower than the valuation at the Board of Revision.