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At closing, the transfer of the real estate interest, whether land, easement, or other interest, is completed. This guide helps users organize and expedite the closing.
Real estate transactions can take months or years to take shape. The parties to the sale or donation of land, easement, or other property interest negotiate terms; the buyer (or donee as the case may be) conducts due diligence; and other matters are addressed. At closing, the parties take the final actions necessary to complete the transaction, and the seller/donor conveys the property interest to the buyer/donee. This guide, coupled with the Model Checklist for Real Estate Transactions, helps users organize and expedite the closing of property transactions for conservation projects.
Preparation for closing begins in earnest upon completion of due diligence. The instructions below provide a plan for the closing of the real estate transaction.
Schedule a time and place for closing, checking to be sure that the project participants can accommodate the schedule. Send a confirmation notice not only to the landowners and their counsel but to all of the project participants and their counsel as well. The schedule may slip due to circumstances outside of the land trust’s control but calendaring a closing date sets a tone of determination and urgency to get the deal done as expeditiously as possible.
Traditionally, closings happened with the parties gathered at a single place and time. However, the COVID-19 pandemic accelerated the normalization of fully remote closings. Obtaining one or two signatures in advance from parties who will not attend an in-person closing is a familiar process, but fully remote closings require an extra degree of diligence and planning. Just as with a conventional closing, a definite remote closing time and place is critical to ensure that the effective dates of documents are consistent, all recordable pages arrive at the correct place by the correct time, and all parties are working on the same timeline. The particulars of obtaining and escrowing signatures of the parties are addressed in more detail below (see “Arrangements for Absentees”).
Prepare a checklist listing the items needed to close the transaction; whose responsibility it is to furnish each item; the date that item needs to be circulated for review (if any); who needs to review or approve that item; the date that review/approval must be completed in order to achieve a closing on the scheduled closing date, which parties require signed copies before or after closing, and whether parties require originals (as opposed to photocopies or digital files).
WeConservePA’s Model Checklist for Real Estate Transactions serves as a tool:
Use the fourth column (status) of the checklist to keep track of the dates when an item needs to be received; circulated for review (if any); who needs to review and/or approve that item; and the date that review/approval must be completed in order to achieve a closing on the scheduled closing date.
The Model Checklist for Real Estate Transactions provides a starting place but organizations must, for each project, build a customized checklist to address the circumstances particular to the transaction. Review the following items in building a checklist to assure that all prerequisites to closing a particular transaction are included in the checklist.
At least a week before closing, begin final preparations for closing by reviewing the checklist, updating the status of each item, and motivating those who have not delivered, reviewed, or approved items to do so without delay.
Check to be sure the board approval covers the final terms of the transaction and furnish all required items to the title company. See the guide Authorization of Real Estate Transactions: Rules and Processes for Nonprofits for more information regarding corporate resolutions.
Circulate final forms of documents (with all exhibits attached) to all project participants for a last look before closing, requesting written confirmation of approval by e-mail. Keep track of the approvals on the checklist.
If the real estate transaction involves subdivision, arrange with the engineer to produce the requisite number of recordable plans for signing by landowners and government officials. Prepare and circulate for final approval by the municipal solicitor any deeds of dedication of rights-of-way or other items listed by the municipality as conditions of approval. These documents, together with the subdivision plan, may be recorded prior to closing or, if landowners want to defer implementing the subdivision until the transaction has closed, they may be delivered to the title company to hold and record following the closing.
Notify (or remind) the project participants and the title company of the precise date, time, and location for closing. Request confirmation whether document signers will attend the closing in person and, if not, what arrangements have been made for signing and document delivery.
Work with the settlement agent to prepare buyer’s side of the settlement sheet as accurately as possible so that buyer has a good estimate of the amount required to complete closing. Arrange for delivery of funds (bank check or wire transfer) to the account of settlement agent either the day before or on the morning of closing.
Money is a key concern of all closings even for the transfer of a wholly donated property. This section of the guide explains the mechanics of how funds are handled at and prior to closing.
There are dishonest people in this world. Some handle money at or prior to real estate closings. Taking precaution is prudent.
Be sure to have an escrow agreement with anyone who holds funds needed to complete closing or to satisfy post-closing obligations; for example:
Insist that the funds be held in a separate account under the buyer’s tax identification number -- not commingled with other funds of the escrow holder. Furnish the escrow holder with IRS form W-9 to assure that the deposit will be held in a segregated account under the buyer’s tax identification number.
Standard form agreements are often used for earnest money deposits; however, escrow arrangements securing post-closing obligations must be carefully tailored to achieve the desired outcome. Enlist the aid of counsel prior to closing if it appears that seller may not be in full compliance with the purchase agreement as of the scheduled closing date.
The company issuing the title policy (such as Commonwealth Land Title, Fidelity National, Chicago Title, and Stewart Guaranty) is referred to as the “underwriter”. Sometimes employees of the underwriter handle closings but, often, title commitments are issued and closings are held by agents for the underwriter.
If funds deposited prior to or at closing will be handled by an agent for the underwriter, (as contrasted with the underwriter itself), then request a protection letter. This is a form letter (issued routinely without charge by underwriters upon request), which furnishes assurance that if the agent, or employee of the agent, misappropriates funds or otherwise handles closing inappropriately, the underwriter (and the assets and reputation of the underwriter) will assume responsibility for the acts, or misacts, of its agent. Absent a protection letter, if the agent takes the money that was deposited and closes up shop, the depositor may only have a claim against the now-defunct agency.
Adjustments to the purchase price and reimbursements by buyer to seller for a portion of the property taxes paid for the year are recorded on the first (front) page of the settlement sheet (HUD-1 Settlement Statement). The settlement agent will ordinarily provide a draft settlement sheet prior to closing so that calculations can be checked prior to closing.
Depending on the terms of the purchase agreement, the purchase price may be subject to change. The guide Purchase and Sale Agreements for Conservation Projects describes a number of ways the purchase price may be adjusted prior to closing based upon survey and appraisal information as well as project funding requirements.
When calculating the funds needed to complete closing, be sure to reduce the sum by the deposit (and any interest or earnings thereon).
When the transaction is a transfer of ownership, the buyer typically reimburses the sellers for prepaid real property taxes allocable to the period from the closing date through the end of the then-current tax cycle.
Example: County and township taxes are assessed on a calendar year basis. If seller has paid the tax for the entire calendar year, the buyer reimburses the seller a sum equal to the daily tax rate times the remaining number of days in the year following the closing date. The daily tax rate is calculated by taking the taxes paid (usually on a flat rate without discount or penalty) and dividing by 365.
When the property conveyed has been subdivided from a larger parcel, taxes need to be allocated between the property and the remainder before the proration is calculated as described above. If the assessment furnishes a land-only value (and the property conveyed to the buyer is land only), that value may often be used to divide the tax proportionate to the land included in the property and the remaining land reserved to seller. Exceptions, of course, apply if the acreage reserved to seller is considerably more (or less) valuable on a per acre basis than the acreage conveyed to the buyer.
In Pennsylvania, transfer tax is assessed on all transfers of real property (other than certain statutorily excluded transactions). One percent is paid to the Commonwealth, and the remainder of the tax is paid to the local municipality and school district. In most cases, the local portion is also one percent, though many home rule municipalities have established higher or lower amounts (e.g., Upper St. Clair Township, 1.5%; City of Scranton, 2.7%; City of Philadelphia, 3.278%). By custom, seller and buyer split the total transfer tax obligation. Transfer to a conservancy is an excluded transaction (061 Pa. Code § 91.193 (18)). See the guide Realty Transfer Tax Exclusions for Conservation-Related Transactions in Pennsylvania for more information. Thus, in a sale to a land trust for fair market value, the seller receives a windfall (typically 1% tax savings) arising solely from buyer’s status as a conservancy. (The “Credit Buyer for Avoided Transfer Tax” section of the guide Purchase and Sale Agreements for Conservation Projects provides a sample provision to include in a purchase agreement to credit buyer for the transfer tax the seller would have paid but for the applicability of the exclusion.)
Sometimes land is acquired subject to farming or other leases. The understanding of the parties as to allocation of rents should be addressed in the purchase agreement; however, as a general rule, rents allocable to periods following the closing date are prorated on a daily rate basis. For example, if the tenant has paid, prior to the closing date, rent through the last day of the month, the seller pays over to the buyer the daily rental times the number of days between the closing date and the last day of the month. Don’t forget to have security deposits (and/or last months’ rents) accounted for and transferred over to the buyer as well!
The second page of the HUD-1 settlement sheet allows the seller and buyer to record payment of costs and expenses incurred in connection with the closing.
In Pennsylvania, the custom is that buyer pays the title insurance premium and other title charges incurred in connection with a transfer. The title insurance premium is regulated by law and is typically based upon the purchase price for the interest. In the case of a donation or bargain sale of the property, the buyer and insurer may agree on a higher amount, typically based on the fair market value of the property. If no policy is purchased, the title company is permitted to charge for costs incurred in searching title.
Title insurance is a prudent investment. Besides insuring the accuracy of the title company’s examination of the public title records, the title insurance policy insures against a number of unknown and unverifiable off-record risks.
Title insurance policies are policies of indemnity; they insure against actual monetary loss incurred due to a covered title defect. Without a monetary loss, there may be no coverage. In cases of a wholly donated parcel of land or easement, the land trust should discuss with counsel and the title company what, if any, protections it will have if it purchases a title policy.
In addition to transfer taxes, 1200 series items on the settlement sheet include recording fees charged by the county recorder of deeds. Fees vary by county, type of document, and number of pages or parties. These charges are typically inserted by the settlement agent, and transaction parties may verify their accuracy by reviewing the applicable fee schedule for the county in which the property is located.
This section provides strategies where a fully or partially remote closing is intended, whether out of convenience or necessity.
A non-attending participant may deliver the necessary documents or funds to a responsible person (often the settlement agent) to hold, in escrow. Escrow deliveries should always be accompanied by a letter instructing the escrow holder of the precise conditions that must be met for release of the escrowed documents or funds. The escrow holder is legally permitted to release the documents or funds from escrow only when all of the identified conditions are met. The escrow holder also needs instructions on what to do if conditions are not met; for example, what happens if closing does not occur by a certain date? Escrow delivery, accompanied by precise instructions, assures project participants that their intentions will be carried out even if they are absent from the closing.
If the final form of the document is available for signing prior to the closing, arrangements may be made for signing before a notary public authorized to acknowledge the signature. Caution! Some recorders reject documents with a notary acknowledgment date earlier than the document date. To avoid that problem but maintain the closing date as the effective date of all documents, change the recital of the document date as follows: “signed [insert earliest acknowledgment date] and effective [insert closing date.]” If multiple signatures are required on the document, and some will be collected prior to closing, it is good practice to include a provision in the document allowing execution in multiple counterparts.
In Pennsylvania, a person authorized to sign documents in an official or fiduciary capacity (for example, as president of a corporation or as trustee for a trust) may not appoint someone else to sign in their stead (other than another officer or trustee authorized to sign under the documents governing the entity). See the discussion in the guide Authorization of Real Estate Transactions: Rules and Processes for Nonprofits.
However, individuals may appoint an agent to sign, under a power of attorney, documents and other items (including the settlement sheet), which must be signed at closing. The form of power of attorney in Pennsylvania is set by statute (20 Pa. Cons. Stat. § 5601). Furnish the power of attorney to the title company before closing because the title company must be satisfied that the power is properly executed and in recordable form and that the scope of the agency created by the power covers all of the documents needed for closing. The power must be recorded with any documents signed by the appointed agent. The statute also provides for a sworn certification by the agent to be appended to the document evidencing that, at the time of signing, the agent had no notice from the person appointing the agent that the person had revoked the power.
Experienced real estate practitioners never leave the closing table without checking off all the items in the closing checklist and taking signed copies of all of the documentation delivered into the closing. In addition to those fundamental requirements, other good closing practices are discussed below.
When a title policy is purchased to insure an investment in land or easement, the practitioner must be sure not to leave closing without a marked-up and re-dated title commitment, initialed by the settlement agent, evidencing satisfaction of the requirements of insurance on Schedule A and removal of taxes, liens, and other items to be delivered by seller on Schedule B-1. The practitioner should check Schedule B-2 as well to be sure it conforms to the understanding pertaining to title and survey reached during the due diligence investigation.
For complex transactions, holders of different conservation interests in the property need to direct the title company as to the proper order of recording of their respective interests.
Example: Several project participants are funding different aspects of a transaction: conservation easement; trail easement; fee simple interest. There may also be deeds of dedication and purchase money financing or leases. The holders of all of these interests need to agree upon the priority of these interests vis-à-vis each other. The directions to the title company as to order of recording will reflect these priorities.
The marked-up title commitment is a contract, binding upon the underwriter, to issue a title policy in accordance with the commitment. The title policy is typically issued when the insured documents are returned from recording.
Documents are typically returned with the title policy; however, if the buyer needs the recorded documents earlier to comply with requirements of project participants, inform the settlement agent. In many counties, recorded documents are now available for pickup from recorders’ offices within days of delivery for recording. In some Pennsylvania locations, recording may be completed within minutes of closing. The title company electronically transmits scanned documents to the recorder and the recorder electronically transmits a receipt with document identification number and date and time of receipt.
It is a good practice to prepare a binder containing all of the documents and other items pertinent to the transaction for future reference. A checklist based on the Model Checklist for Real Estate Transactions is easily transformed into the index for the binder by deleting the 3rd and 4th columns and most of the non-numbered rows (those that contain reminders rather than items to be included in closing binder). The remaining numbered items should correspond to the final signed documents, reports, and other items to be included in the binder.
If the land or easement is being donated in whole or part and the donor intends to claim a federal tax deduction for making a charitable contribution, then the recipient of the gift must issue a substantially contemporaneous acknowledgment of the donation (as described in IRS Publication 1771, Charitable Contributions–Substantiation and Disclosure Requirements).
For non-cash donations of $5,000 or more, the recipient of the gift must sign the IRS Form 8283 as well.
