Special Use Ad Valorem Tax Valuation for Developers
Chris Burti, Vice President and Senior Legal Counsel, Statew

The 2015 Legislative session has produced a bill that exempts the increase in value of real property held for sale by a builder from property tax, to the extent the increase is attributable to subdivision or improvements by the builder and will be of interest to all who advise developers and builders. Session Law 2015-223 provides that residential and commercial real property as defined and held for sale by a builder is designated a special class of property under authority of Article V, Sec.2(2) of the North Carolina Constitution. The builder must apply for the available exclusion annually. In appraising eligible property, the tax assessor shall specify what portion of the value is an increase “attributable to subdivision or other improvement by the builder."

Residential property is defined as “real property that is intended to be sold and used as an individual's residence immediately or after construction of a residence, and the term excludes property that is either occupied by a tenant or used for commercial purposes such as residences shown to prospective buyers as models.” It remains exempt as long as the builder continues to hold the property for sale, but no more than three years from the time it was first subject to being listed for taxation by the builder.

The bill also deals with commercial property which is broadly defined. The exclusion for commercial ends at the earlier of the following:

(1)    Five years from the time the improved property was first subject to being listed for taxation by the builder.

(2)    Issuance of a building permit.

(3)    Sale of the property.

The provisions of the act are effective for taxes imposed for taxable years beginning July 1, 2016, and apply to the subdivision of or improvements made on or after July 1, 2015. The full Text of the legislation follows:

SESSION LAW 2015-223

HOUSE BILL 168

SECTION 1.

G.S.105-273(3a) is reenacted and reads as rewritten:

"(3a)" Builder "means a taxpayer licensed as a general contractor under G.S.87-1 and engaged in the business of buying real property, making improvements to it, and then reselling it."

SECTION 2.

Article 12 of Chapter 105 of the General Statutes is amended by adding a new section to read:

"§105-277.02. Certain real property held for sale classified for taxation at reduced valuation.

(a) Residential Real Property. - Residential real property held for sale by a builder is designated a special class of property under authority of Article V, Sec.2(2) of the North Carolina Constitution. For purposes of this subsection, " residential real property" is real property that is intended to be sold and used as an individual's residence immediately or after construction of a residence, and the term excludes property that is either occupied by a tenant or used for commercial purposes such as residences shown to prospective buyers as models. Any increase in value of this classified property attributable to subdivision of, improvements other than buildings, or the construction of either a new single-family residence or a duplex on the property by the builder is excluded from taxation under this Subchapter as long as the builder continues to hold the property for sale. In no event shall this exclusion extend for more than three years from the time the improved property was first subject to being listed for taxation by the builder.

(b) Commercial Property. - Commercial real property held for sale by a builder is designated a special class of property under authority of Article V, Sec. 2(2) of the North Carolina Constitution. For purposes of this subsection, " commercial real property" is real property that is intended to be sold and used for commercial purposes immediately or after improvement. Any increase in value of this classified property attributable to subdivision of or other improvements made to the property, by the builder, is excluded from taxation under this Subchapter as long as the builder continues to hold the property for sale. The exclusion authorized by this subsection ends at the earlier of the following:

(1) Five years from the time the improved property was first subject to being listed for taxation by the builder.
(2) Issuance of a building permit.
(3) Sale of the property.
   (c) The builder must apply for any exclusion under this section annually as provided in G.S.105-282.1.
   (d) In appraising property classified under this section, the assessor shall specify what portion of the value is an increase attributable to subdivision or other improvement by the builder."

SECTION 3.

This act is effective for taxes imposed for taxable years beginning on or after July 1, 2016, and applies to subdivision of or other improvements made on or after July 1, 2015.

In the General Assembly read three times and ratified this the 13th day of August, 2015.

s/
Philip E. Berger
President Pro Tempore of the Senate

s/
Tim Moore
Speaker of the House of Representatives

s/
Pat McCrory
Governor
Approved 2:22 p.m. this 18^th day of August, 2015

Applying ALTA Best Practice 5 in North Carolina
Chris Burti, Vice President and Senior Legal Counsel, Statew

There is a lot of conversation currently among real estate professionals in North Carolina concerning the imminent effective date for the CFPB requirement for use of the new TRID disclosure forms, related software and implementation rules. Unfortunately some are under the impression that the requirement by lenders for implementation of the ALTA Best Practices for settlement service providers has, likewise, been postponed. It has not. All attorneys closing real estate transactions and all title companies issuing policies in North Carolina should already be in compliance. ALTA's Best Practices program is designed around a working model where title and closing services are typically offered by the same settlement services provider. Because closing a real estate transaction in North Carolina is construed as the practice of law, the title industry works in coordination with North Carolina attorneys who handle the settlement aspect of real property transactions and these Best Practices will apply differently depending on the respective responsibilities of the participants.

One of the first signs of lenders implementing their CFPB driven efforts to comply with the new requirements can be seen in their current requests for compliance with the policies promulgated by ALTA Best Practices Pillar Number 5. That Practice requires adoption of policies for the timely issuance of title insurance policies and that portion of the Practice is set out as follows:

5. Best Practice: Adopt and maintain written procedures related to title policy production, delivery, reporting and premium remittance.

Purpose: Adopting appropriate procedures for the production, delivery, and remittance of title insurance policies helps ensure title companies can meet their legal and contractual obligations.

Procedures to meet this best practice:

• Title policy production and delivery.
• Title insurance policies are issued and delivered to customers in a timely manner to meet statutory, regulatory or contractual obligations.
• Issue and deliver policies within thirty days of the later of (i) the date of Settlement, or (ii) the date that the terms and conditions of title insurance commitment are satisfied.

The ALTA Best Practices were written with the settlement service model in use in a large majority of states were title companies are the settlement service providers that abstract title, issue commitments, close transactions, disburse funds and then issue the title polices. Unlike that model, North Carolina has segregated the title abstracting and closing functions from the policy underwriting and issuance functions. This is done to reduce conflicts of interest and provide discrete regulatory protections for consumers.

Lenders do not typically make distinctions between the differences in the various state models and are typically beginning to demand that title insurance policies be delivered within thirty days of closing. They are apparently interpreting the policy statement to require that in order to comply with the policy that "Title insurance policies are issued and delivered to customers in a timely manner to meet statutory, regulatory or contractual obligations..." the service provider should "Issue and deliver policies within thirty days of ... the date of Settlement". This is not what the ALTA Best Practice 5 says, nor is it reasonable to interpret it this way in all cases in North Carolina. However, to the extent that this time line can be accomplished reasonably, Attorneys and title companies should work together to meet this timeline as often as possible.

The policy would be better understood as saying: "Title insurance policies will be issued and delivered to customers in a timely manner to meet statutory, regulatory or contractual obligations. To be timely they will be issued and delivered policies within thirty days of the date of Settlement, or as soon thereafter as the terms and conditions of title insurance commitment are satisfied." For title companies this will mean receipt of the Attorney's final opinion clearly evidencing that all of the title and closing requirements of the Commitment have been complied with along with the proper appropriately executed lien affidavits, indemnities and waivers, any required supporting documents and the premium check. For closing attorneys, stricter compliance with the North Carolina State Bar's requirements of prompt disbursement of client's funds and diligent handling of the client's legal matters will require a closer review of post-closing operations in the law firm. It has also been suggested that closing attorneys may be well advised to inquire as to the turnaround time for title insurers to whom they are sending business. If the insurer cannot report their actual statistical turnaround time for issuance and mailing of policies after "the terms and conditions of title insurance commitment are satisfied", it may well raise a question of that company's compliance with ALTA Best Practice 5.

Statewide Title, Inc. has adopted ALTA's Best Practices in compliance with the requirements promulgated by the CFPB. On March 5th 2015, Statewide Title completed a self-assessment using ALTA's Best Practices Assessment Procedures which resulted in a grade of pass.

North Carolina Attorneys developing or refining their own Best Practices Policies can now log in to their Statewide Title account and download sample forms drafted specifically for your use in developing compliant polices for North Carolina law firms. As the policies should be developed for the unique nature of each law practice, they should not be simply copied and the blanks filled in. The Best Practices are very general in their terms in many respects and currently, there are numerous unanswered questions both as to the detail that must be contained in the promulgated policies; how they are to be specifically implemented, and the extent to which these best practice policies must be documented.