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In many ways, a large commercial transaction can be approached in the same way as a small residential purchase or refinance. However, some problems and issues arise only in the context of commercial real estate closings. ALTA Survey An American Land Title Association (ALTA) survey is sometimes required on a commercial closing, and almost always when there is syndicated loan work or on a loan by a major bank. It usually is required in the context of a large, or particularly valuable, commercial property or multi-unit apartment complex. An ALTA survey is much more comprehensive and inclusive than a normal boundary type survey. In the article “What is an ALTA survey? How does it differ from a property survey,” Robert B. Ludgate, Sr., P.E., P.L.S., states that an ALTA survey may include data about zoning, ground elevations, building and improvement dimensions, parking areas, utilities and occupancy. See www.ludgate-eng.com/alta.html. An ALTA survey will show property lines and corners; encroachments onto the subject property or encroachments emanating from the subject property; all means of access; any water courses near the property; all physical improvements on and adjacent to the property; and all easements or rights-of-way on or across the property. Additionally, an ALTA survey may include monuments placed at all major corners of the boundary of the property; a vicinity map that shows the property surveyed and references to nearby highways or major street designations; flood zone designations; land area in square feet; and acres to one-thousandth accuracy. A specific certification by the surveyor on the survey is required on an ALTA survey. Accordingly, an ALTA survey is substantially more expensive and time consuming than a regular survey. Zoning Endorsement The title policy excludes coverage for zoning law restrictions and land use restrictions that affect the premises and that are not disclosed through a search of the public records. Protection against such zoning law and land use restrictions on a title policy arises through purchase of a separate title zoning endorsement. ALTA Endorsement Form 3 applies for unimproved land, and ALTA Endorsement Form 3.1 applies for improved land. In Fineberg, Handbook of New Jersey Title Practice, Chapter 116, Section 11601A (3d Ed.), it states: ALTA endorsement No. 3 . . . states the zoning classification of the land and the permitted uses under such classification. ALTA endorsement No. 3.1 . . . gives the same coverage as No. 3. In addition, it provides affirmative insurance against a final decree of a court of competent jurisdiction, prohibiting the use of the land or requiring removal of the building, on the grounds of a violation of the municipal zoning ordinance pertaining thereto. The ALTA 3.1 endorsement has been modified to now include language regarding parking spaces. The zoning endorsement is costly. Endorsement 3 costs an additional 15 percent of the title premium and endorsement 3.1 costs an additional 20 percent of the title premium. In addition, in order for the endorsement to be issued, a legal opinion letter written by an attorney is required by the title insurer. The opinion letter must cover all items of coverage in the zoning endorsement. An opinion letter in itself is expensive and is not easily obtained. Unless a law firm did the land use work, firms are usually reluctant to issue an opinion letter because of the liability involved. Under some very limited circumstances the title insurer may accept a letter from the municipal zoning officer, with certain criteria, in lieu of requiring the attorney opinion letter. Further, again in certain very limited circumstances, the title insurer may rely on the ALTA survey, in lieu of requiring the attorney opinion letter. Access to the Premises The title policy insures against the risk that the insured will not have legal access to and from the insured premises. Determining whether there is an insurable right of access by some means is usually not a problem. It can be fairly easily ascertained by reference to a survey, or by reference to a filed map, along with reference to the tax map, showing an adjacent street or road providing access. However, especially in the context of industrial real estate, a problem sometimes arises if the insured premises are adjacent to a railroad. In such a case, access is sometimes through a right of way granted by the railroad on property owned by the railroad. The means of access may only be by way of easement or, in a more troublesome scenario, by license agreement � which is revocable. As a practical matter, the title insurer may have to do an extensive title search to determine the validity of the title held by the railroad. This may entail engaging a surveyor who will be able to review old grants � to sort out ownership rights � in preparing the survey. Separate pieces of the parcel may have been conveyed to the railroad at different times. Other questions may also arise, such as: Was there a right of reversion in the deed to the railroad? Are there trunk lines? Consents by the Entity and Proof of Authorization When the transaction involves a conveyance or mortgage by a corporation, partnership or limited liability company, the title commitment contains standard requirements. These include requiring pertinent documents for review, proof of status and proof of authorization for the transaction, and possibly consents by the individuals. Sometimes the entity has a Byzantine and complex history that is hard to trace. Partners may have gone in and out of the partnership many times. The main issue is finding out who has the power to convey or mortgage. Also, the entity may have changed its form � for example, from partnership to a corporation � and proof of merger may be required. A corporation normally acts through its board of directors, with actions memorialized by a written corporate resolution. However, a corporate resolution cannot always be relied upon to establish authorization. If the transaction is a conveyance of all the corporate assets, and which is not in the normal course of corporate business, shareholder approval is required. Also, the corporate certificate of incorporation, or resolution itself, may require shareholder approval. If shareholder approval is required, it is desirable to obtain a certified copy of the corporate bylaws or minutes showing this approval. In some instances it may be necessary to obtain from the corporate secretary a list of the names of the current corporate officers and board of directors. In a limited liability company, the manager normally executes the closing documents. However, the operating agreement for the company may restrict the power of the manager. If there is a written operating agreement, the title insurer must be provided with a copy to review in advance of closing. If there is no written operating agreement, it is desirable to obtain the written consent of all members. Also, even if there is a written agreement, if the transaction is a conveyance of all the assets, or if it is not in the ordinary course of business, the consent of all members should be obtained. If the transaction involves a conveyance or mortgage by a partnership, the partnership agreement should be reviewed and proof is required that there has been no change of partners. As stated in Handbook of New Jersey Title Practice: “One should normally require that all partners execute the instruments to be insured. If the partnership agreement specifically permits certain partners to sign, or if a statement of partnership authority has been filed, it is generally-accepted practice to rely on such provision, provided that evidence of consent by the non-executing partners is obtained.” Corporate Franchise Tax and Good Standing If a corporation is conveying or mortgaging, the title insurer will require proof of the corporation’s status. This is normally obtained from an abstract company in the Trenton area. The corporate status report will show if the corporation is incorporated and if its charter is still in effect. Sometimes the report will show that the corporate charter has been revoked for failure to file annual reports or for failure to pay franchise taxes. Filing past due annual reports is usually simple and inexpensive, but this is often not the case for unpaid franchise taxes. As a result of the corporate status report, it may be ascertained that the name on the current-owner deed, a corporate owner, is incorrect. This may necessitate the recording of a corrective deed. If the corporation business tax, commonly known as the franchise tax, remains unpaid, it becomes a lien on all property owned by the corporation for 10 years. The liability for the tax is computed from the first day of the year in which it is due and payable. However, the lien for the tax does not attach until the first day of the year following the year in which the tax is due. The title insurer will order a franchise tax search along with the corporate status report. The problem is that the results of the franchise tax search are usually not available for six to eight weeks. Often, the closing is to occur before the search results are received. When this happens, satisfactory proof of filing the return and payment of the tax must be obtained. Sometimes this can be achieved by a letter from the corporate accountant, who will provide a copy of the tax return(s) and cancelled check(s). In other instances a substantial monetary escrow � along with an indemnification satisfactory to the title insurer � will be obtained. The most troublesome scenario is when there is a corporate former owner, back in the chain of title, for which corporation there is a franchise tax lien. It may be extremely difficult to obtain the required proofs from representatives of that corporation that will serve to omit the lien. Unfortunately, an escrow and indemnification is probably not obtainable from the corporation which no longer is the owner. Review of Documents in Chain of Title In a mortgage title commitment, copies of the recorded documents in the chain of title are annexed to the commitment. It is not unusual, in a normal residential closing, that some of these standard type documents, such as a public service easement, are merely glanced at and not carefully reviewed by the attorneys. This type of cursory review can have serious ramifications in the context of a commercial transaction. The terms of all deeds, restrictions and easements, and so on, must be carefully reviewed. There may be “buried” language, establishing a restrictive covenant, the terms of which will essentially kill the deal. Trusts Title is sometimes conveyed by, or to, a trust. This is especially true in commercial transactions, much more often than in residential transactions. A trust cannot be the legal fee owner of premises. Fee ownership is to be in the name of the trustees, in their capacity as trustees. If the last deed of record incorrectly vests title, a corrective deed may be required. The title agent must review the trust agreement, to determine if the trustees have the power to convey or mortgage, or to determine who is authorized. The title agent must also make sure that the trust agreement does not prohibit or restrict the insured transaction. If there is no written trust agreement, and the beneficiaries are competent, it may be necessary to have the trustees and beneficiaries execute the deed or mortgage. This will merge the legal and equitable titles, thus terminating the trust. Numerous special limited circumstances may arise when title endorsements are requested in commercial transactions. � Shared appreciation endorsement. This endorsement is sometimes called an “equity kicker.” It is requested when, by the terms of the mortgage, the mortgagee is permitted to share in the profit realized upon sale of the secured real estate. The endorsement insures against loss that results from a final non-appealable judgment by a court of competent jurisdiction, which holds such a mortgage provision providing for shared appreciation is invalid or unenforceable. The cost for this endorsement is $25. � Mezzanine financing endorsement. This endorsement is attached to the owner’s policy and the additional cost is 30 percent of the title premium. It applies when money is lent to individuals who are members or partners in an entity such as a limited liability company or partnership. As security for the loan � because the value of the real estate is insufficient � there is a pledge to the lender of the interests of the borrower as a member or partner in the entity. The endorsement secures the rights of the “mezzanine” lender to the proceeds of a distribution of title insurance, with regard to the insured real estate. First, it protects the mezzanine lender if the distribution is made before acquisition by the mezzanine lender of some, or all, of the borrower’s interests in the entity. Second, if distribution of the insurance is demanded after the mezzanine lender acquires an interest in the entity, the endorsement insures against a defense and denial of payment, based upon unrecorded liens, defects and encumbrances, causing loss, known by the original insured at the date of the title policy, but not actually known by the mezzanine lender. It also insures against denial of coverage based upon a transfer of ownership. The endorsement also provides other conditions and protections. (Revisions to this endorsement were pending at the time this article was submitted for publication. However, the basic coverage afforded will remain essentially the same.) � Application of mortgage payments. The additional cost for this “last dollar” endorsement is 10 percent of the title premium. It applies when the amount of title insurance is less than the mortgage amount. Normally, payments made to the indebtedness reduce the amount of title insurance liability, on a dollar-for-dollar basis. However, this endorsement provides protection. The amount of title insurance coverage will not be reduced by payments made to the lender until the principal debt outstanding under the mortgage is reduced, so as to be the same amount as the title policy amount. � ALTA No. 12 (aggregation). The additional cost for this endorsement is 10 percent of the title premium. This endorsement affords the lender protection if there is a “blanket” type mortgage, secured by several different premises, each having separate title insurance. The endorsement provides that the available insurance will be the aggregate amount of all the insurance policies. When payout under the policies is made, payout is made on a pro tanto basis, that is, in an equivalent amount from the policies. � Contingent loss. The additional cost for this “first loss” endorsement is 10 percent of the title premium. This endorsement protects the lender if there is a blanket type mortgage “blanketing” both insured and non-insured premises. If there is a loss under the policy that exceeds 10 percent of the policy amount and affects only the insured premises, the title insurer will be liable for payment. The insured is not required to pursue remedies against the other non-insured premises blanketed by the mortgage. � Fairway endorsement; partnership and L.L.C. The cost for each of these endorsements is $50. This type of endorsement applies if there is an admission, withdrawal or change in interest of a partner in an ongoing partnership, or of a member in an ongoing limited liability company. If the partnership or limited liability company remains in operation, the title insurance coverage remains in effect regardless of the change in partners or members, or their interests. � Non-imputation endorsement. The additional cost for this endorsement is 20 percent of the title premium. It is issued on an owner’s policy. It is meant to apply, for example, if there is a partnership between an inactive investor and a developer. The developer may have taken action or made representations that would permit the insurer to deny coverage, under the “acts of the insured” standard exclusion. With this endorsement the insurer may not deny coverage to one partner based on matters imputed to that partner by law, solely on the basis of his or her being a partner. The insurer will have specific requirements to approve issuance of this endorsement. (Revisions to this endorsement were pending at the time this article was submitted for publication. However, the basic coverage afforded will remain essentially the same.) Gelfond, state underwriting counsel for United General Title Insurance Company of Red Bank and a former deputy attorney general of New Jersey, thanks Michael Donini of Madison Title Agency in Lakewood and Jeffrey Gussoff, a partner at Wolff & Samson of West Orange, for their assistance in the preparation of this article.

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