Ohio Revised Code 319.203 allows each county in Ohio to adopt standards regarding governing conveyances of real property in Ohio. While most Ohio counties have very similar standards and rules, there are sometimes subtle differences, and it is incumbent on the parties buying, selling and developing real property to make sure they comply. Within the last month, Cuyahoga County has decided that it wants to revise certain portions of its standards, and arguments are being made whether they make conveyances more efficient or more difficult. The Cuyahoga County Fiscal Officer and Engineer previously held a public hearing on the new standards on Feb. 8, 2023 and will hold another public hearing on Feb. 24, 2023. If the new standards are approved, there are items that all buyers, sellers and developers must be prepared to meet. The full list of changes is too long to cover in this article, but they can be found here: https://fiscalofficer.cuyahogacounty.us/pdf_fiscalofficer/en-US/ConveyanceStandardsAnnouncement.pdf. While the hope is that the new standards, if approved, will allow for more efficiency, there is already debate as to whether that will be the case.
The following is just a couple of the changes that may have a great impact:
The new proposal requires that every foreign entity (i.e. an entity formed in a state other than Ohio) attempting to convey or accept an interest in real property be registered with the Ohio Secretary of State. It seems the argument for this change is that Cuyahoga County often has a difficult time finding valid contact information for an owner. For example, if there is a deadbeat landlord that is not maintaining a property, Cuyahoga County is looking to be able to turn to the Ohio Secretary of State’s website for an agent to notify in Ohio. The arguments against the proposed change include that foreign entities often hold title to real property in a passive manner and there is no legal requirement to register in Ohio (if certain requirements are met). Requiring a foreign entity to register in Ohio means that every foreign entity would have to pay for an additional filing fee to the Ohio Secretary of State and also presumably pay someone in Ohio to be a statutory agent. Another argument against the proposed change is that if a foreign entity does not have valid contact information on conveyance documents, there is nothing to stop that foreign entity from invalid contact information with the Ohio Secretary of State.
Drop and Swaps
Many articles have been written about the ability in Ohio to do what is known as a “drop and swap” or a “drop down” transaction. The basic procedure involves: (1) forming a new limited liability company with the current owner as its sole owner; (2) conveying the real property into the newly created limited liability company for no consideration (which would involve filing an exemption from conveyance fees form with the County); and (3) the seller of the real property later conveys the membership interest of the newly created limited liability to a buyer. With these types of transactions, there would be no conveyance fee payable to the County and the County would also not know the purchase price for the transaction (thus meaning that the County has a more difficult time re-assessing the real property taxes to the purchase price). Presumably, every county (and school board) would rather be able to charge the conveyance fee and increase real property taxes upon a conveyance.
In 2018 and again in 2019, the Ohio House of Representatives proposed legislation to terminate the ability to do these types of transactions; however, it has not passed and the ability to do them continues. With the recent changes to the conveyance standards proposed by Cuyahoga County, it seems that they are trying to make it much more difficult for these types of transactions. In its proposal, Cuyahoga County is allowing the Cuyahoga County Fiscal Officer to require numerous documents if someone is trying to exempt a transaction, including affidavits, purchase agreements, settlement statements and resolutions. It also provides the Fiscal Officer the right to request “any form deemed necessary by the Fiscal Officer that sufficiently substantiates the claim of exemption or sufficiently verifies the sales information.” Although vague, it seems that Cuyahoga County is trying to dissuade a “drop and swap” transaction. If the new standards are passed and given the number of these types of transactions that are done, it will be interesting to see how this new provision impacts the number of real estate deals done in Cuyahoga County.
If you have questions about the proposed new standards or their potential impact, contact Real Estate Partner Matt Viola (MTV@kjk.com; 216.736.7253).