Section 18K of the “AS IS” Residential Contract For Sale And Purchase (“the AS IS Contract”) and the Residential Contract For Sale And Purchase (“the Standard Contract”) states the following items shall be prorated as of the day prior to the Closing Date, or date of occupancy if occupancy occurs prior to the Closing Date: real estate taxes (including CDDs and assessment imposed by special districts), interest, bonds, association fees, insurance, and rents. It is important to mention that any item not mentioned in Section K of the Contract(s) shall not be prorated under the terms of the Contract unless modified elsewhere in the Contract. Below, two common prorations and one misconception of a non-prorated item are discussed:
- Propane tanks may be on a property as a storage container for propane gas, which is commonly used to power various household appliances like stoves, water heaters, and sometimes even generators. Propane tanks are not mentioned in either the AS IS or Standard Contract and are not prorated unless modified elsewhere in the Contract. If a propane tank is on a property and the Seller wants to recoup funds for the remaining propane in the tank, additional language will need to be added to the Contract. We strongly encourage you to consult your trusted real estate attorney for the language.
- Real estate taxes include ad valorem taxes and non-ad valorem taxes. Ad valorem taxes are paid in arrears (paid backward at the end of the year for the current year) and are based on a calendar year of January 1st to December 31st. Non-ad valorem assessments are paid in advance and are on a fiscal year, typically October 1st to September 30th. Stormwater utility, fire and rescue, and solid waste collections are a few common examples of non-ad valorem assessments. Despite ad valorem taxes being paid in arrears and non-ad valorem taxes being paid in the future, they are joined on the same tax bill and payable at the same time. Therefore, when taxes are prorated on a settlement statement, the taxes are split to be prorated in accordance with the type of assessment – ad valorem or non-ad valorem.
- A Community Development District (CDD) is a governmental unit created to serve the long-term specific needs of its community. Its purpose is to plan, fund, construct, operate, and maintain community-wide infrastructure and services like roads, utilities, parks, and landscaping. A Stewardship District functions the same way as a CDD. Usually, it includes a much larger area – for example, the Lakewood Ranch Stewardship District—the AS IS and Standard Contract call for CDDs and Stewardship Districts to be prorated at closing. Assessments levied by CDDs and Stewardship Districts are composed of two components: (1) repayment of bonds issued to finance infrastructure construction, which repayment is based on fixed, predetermined amounts, and (2) repayment of fees based upon the annual determination of each Stewardship District’s elected board.
If you have any questions about which items are prorated, which are not prorated, and/or how prorations impact a real estate closing, please do not hesitate to contact your real estate attorney.
