Chris Mitchell*

Vice President / Manager

Uptown & Frisco Offices

Lawyers Title Company

Ph: 972-342-7876

Chris.Mitchell@LTIC.com

*Director of Public Relations and Communications for The DFW YEA! Network

Many Real Estate professionals may not fully understand the importance of a Tax Certificate provided to your customers in their Commitment for Title Insurance package. This blog will highlight the importance of watching tax certificates on every transaction...especially when dealing with properties built in the last few years. This example was a simple transaction on a home built in 2009…but Central Appraisal District and tax office never triggered AG rollbacks on the entire subdivision, believe it or not... The property tax statues allow for rollbacks of up to 5 years from the date of change in land usage/ownership. That means if land usage/ownership changed in 2009, the tax office could roll taxes back as to as far as 2004 and collect taxes accordingly!

Example:

Developer buys an undeveloped 50 acre tract in 2003 with the intent to build a subdivision in the next few years. Since they will be setting on unimproved property for several years, the developer leases the land to a local farmer to use for grazing cattle and files for an Agricultural Exemption (“AG Exemption” ) on the entire 50 acres. The AG Exemption establishes taxes based on the value of the “production” from the land. Needless to say, this greatly decreases the annual taxes for the 50 acre tract (the “Parent Tract” ). In 2009 the Developer commences grading/construction/replatting work on the new subdivision infrastructure, etc. (this triggers a “Change in land usage/ownership” ). Taxing authority fails to trigger and calculate rollback taxes for the last 5 years and Developer doesn’t follow-through on the detail to make sure their tax liabilities were satisfied. Subdivision is complete and houses are ready to be sold. Properties are purchased by numerous individuals and families in late 2009. The Escrow Officer at the Title Company who closed their purchase missed the informational not on the tax certificate indicating the property was subject to rollback taxes on the parent tract and closed the transaction! A year passes since they closed on their new home and never a worry about rollback taxes. The property owners see historical low interest rates and decide to refinance the property. The new Escrow Officer at the new Title Company the will be working with immediately notices the rollback issue and notifies the parties to the transaction. The Loan Officer working on the new loan hasn’t experienced this before and isn’t sure if this is an issue to get the deal closed so he calls the Escrow Officer to discuss the options.

Simply put:

If a developer doesn’t pay the rollbacks, and the tax office forecloses on the entire subdivision for non-payment of taxes…that has the ability to extinguish the lien we are creating. The tax lien could have the priority lien position as of the first day of the year for which the taxes are owed, which is oftentimes even before the conveyance to the existing owner. That is why this is such a sensitive topic -- it could cause a total failure of title.

Typically, a Texas Title Insurance Company will have two real options here:

1) Wait for rollbacks to be triggered/assed/paid and a clean tax certificate to be issued and close without exception to rollbacks; or

2) Close subject to rollbacks and accept the commitment/policy subject to rollback taxes (See below for more info on option #2)

That being said…

Texas Title Insurance Companies typically cannot provide the rollback coverage without clearing the tax entire rollback issue…which most Texas Lenders/Investors will require (typically). The proposed insured under the commitment would need to confirm in writing that they will not require the rollback tax coverage in the final loan policy (accepting Schedule B, Item No. 5, as exactly as shown in the commitment – except that the “Not Yet Due and Payable” language may still me amended). Rollback Taxes would need to be fully addressed by each of the taxing authorities (City/County/ISD/etc.) before the transaction could be insured without exception to Rollbacks.  On the Commitment for Title Insurance, please look at item 5 of Schedule B as it pertains to rollback taxes Excepted to from the title insurance coverage. Typically a Texas Title Insurance Company could delete certain language from that exception to provide more coverage to the insured (See below in with regard to Procedural Rule P-20.B.1-2), but when rollbacks are outstanding, not billed and Due…It changes what we can do under the Texas Title Insurance Regs.

P-20 Standard Exception Relating to Taxes

A. Taxes for the Current Year

1. In connection with the issuance or amendment (after issuance) of any Owner's Policy,

LoanPolicy, or of any Loan Title Policy Binder on Interim Construction Loan (Interim Binder),

an exception must be shown on Schedule B to taxes and assessments for the current tax

year by any taxing authority, and the Company may not insure that taxes for the current tax

year are paid, unless:

a. Taxes are Paid or Collected at Closing. A company may insure that taxes for the

current tax year are paid if:

(1) All of the taxes for the current tax year have been assessed by the taxing

authorities;

(2) The Company has satisfactory evidence in its file that the assessed

taxes for the current year have been paid by the owner or

 (3) If all of the taxes for the current year have not been paid:

 (i) The unpaid taxes are collected at closing by the Company; and

(ii) The Company will pay the taxes in the ordinary course of business.

b. Owner's Tax Reserve/Escrow Account With Payoff Lender. A Company may insure that taxes are paid for the current tax year if:

(1) The Company has satisfactory evidence in its file that the assessed taxes for the current year have been paid by the current lender from the owner's Reserve/Escrow Account held by lender, or

(2) In the absence of satisfactory evidence in (1) above, a Company may accept:

(i) A sufficient Indemnity executed by a responsible party,

(ii) Together with a deposit of funds in an amount sufficient to pay the assessed taxes.

(3) When following provision (2) above, the Company shall:

(i) Pay the assessed taxes according to the terms of the Indemnity and before they become delinquent, or

(ii) Upon receipt of satisfactory evidence that the assessed taxes for the current year have been paid, promptly pay the escrowed funds to the proper party.

2. If all taxes for the current year have not been assessed by the taxing authorities, the Company may not insure that taxes for the current year are paid.

B. ROLLBACK TAXES

1. In connection with the issuance or amendment (after issuance) of any Loan Policy or of any Loan Title Policy Binder on Interim Construction Loan (Interim Binder), and upon payment of the premium required under Rate Rule R-19, the words: "and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership", as contained in the standard tax exception may be deleted by:

(a) Deletion of such words upon the policy or binder form, either by checking the appropriate box on a Form T-2 or T-2R or by lining through the words or by producing an electronic form with the words; or

(b) By attachment to the policy or binder of endorsement form T-30.  The deletion of the above phrase from the standard tax exception is hereafter referred to as "insure or insuring against rollback taxes".

2. A Company may not insure against rollback taxes unless:

a. The Company has satisfactory evidence in its file that the assessed taxes for the current year are not based on an agriculture or open-space valuation; or 

b. (i) The rollback taxes have been assessed by all of the taxing authorities;

(ii) The rollback taxes are collected at closing by the Company, and

(iii) The Company will pay the roll back taxes in the ordinary course of business.

C. TAXES NOT YET DUE AND PAYABLE

In connection with the issuance of a Loan Policy or Loan Title Policy on Interim Construction Loan (Interim Binder), upon payment of the premium in R-24, a Company may:

1. If satisfied that all taxes, standby fees and assessments by any taxing authority for the year of  the issuance of the Loan Policy or Interim Binder are not yet due and payable, add the following after the standard tax exception: "Company insures that standby fees, taxes and assessments by any taxing authority for the year _____ are not yet due and payable." The addition may be made either by checking the appropriate box on a Form T-2 or by otherwise inserting the additional words into the form.

2.  If a Company determines that some, but not all of the taxes are not yet due and payable, the Company may add the following after the standard tax exception:

"Company insures that standby fees, taxes and assessments by any taxing authority for the year _____ are not yet due and payable, as to [insert name of applicable taxing authority/authorities] only."