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What’s wrong with Private Transfer Fees?

Have you heard of Private Transfer Fees?  A private transfer fee is a fee that is required to be paid each time a property is sold at closing.  The transfer fee is attached to the property as a covenant that can run for a period, often 20 or 100 years.

The fees are being used for a variety of purposes.  In some cases, they have been used to satisfy demands from environmental groups.  Developers have also used them, by securitizing them up front, to help pay mitigation costs and up-front infrastructure costs on new developments.  Supposedly even private home owners might be able to add a 1% transfer fee to their homes with revenues serving as future household income.

The NAR, American Land Title Association and the NAHB are all looking at ways to prohibit or limit private transfer fees.  While that tends to make me like the idea of transfer fees on its own, I really don’t see issues with them.  Admittedly, I develop properties from time to time.  Yes, I am frustrated with impact fees, mitigation and infrastructure fees that have climbed to the stratosphere in my little part of the world.  This approach could really help to create some affordable homes that people might actually buy.

Freehold Capital Partners is active in the reconveyance fee financing arena working with developers to structure financing for infrastructure improvements.

Essentially, the concept is based on the premise that improvements which enhance real property are in the immediate and long-term public interest; and a system enabling present owners of private property to better and more fairly apportion present costs and profits amongst multiple future beneficial owners increases economic efficiency.

Traditionally, initial buyers shoulder 100% of the burden of amenities, infrastructure and other improvements, which creates a high barrier to entry into the development. By utilizing this funding tool, developers can now more fairly apportion expenses incurred for permanent improvements among successive owners of the property who will be enjoying the amenities and improvements for years to come. (A familiar example would be bonds issued to finance new schools, where the bonds are paid off over time by the same families whose properties continue to benefit from having a school in the community.) In fact, Transfer Fee financing has often been referred to as the creation of a “mini-bond”. However, unlike traditional bond financing, the transaction costs associated with creating Transfer Fees Rights are minimal.

Flowing from this premise, reconveyance fee financing enable institutional owners and developers to allocate costs amongst future willing buyers by requiring, in connection with each subsequent transfer of title, the payment of 1% of the gross sales price.. – Freehold Capital Partners

The NAR, ALTA and others cite concerns about disclosure.  However, a properly recorded covenant should show up in a title search so I think that cannot be the real concern.  They cite concerns that people never read covenants.  That floors me!  I can’t imaging buying a home without reading the covenants.

The National Association of Realtors and the American Land Title Association, for example, are asking their members to persuade legislators to prohibit or limit the use of investor-oriented private transfer-fee programs. Even the National Association of Home Builders, some of whose members reportedly have signed up to offer transfer fees, isn’t convinced the idea is sound.

“It’s a very creative concept,” said David Ledford, the builder association’s senior vice president for housing finance, “but it’s largely untested and controversial politically.” – Seattle Times

Homes that are subject to a reconveyance fee should sell at a lower price due to the reconveyance fee.  That lower price should be reflected in assessments and lower property taxes.  So, all those infrastructure improvements the developer had to put in wouldn’t show up completely in the taxed value of the property.  I like that the property owner may not end up paying property tax on improvements which are typically deeded to the local government which was simply double taxation before.

California has laws that require upfront disclosure of reconveyance fees.  Texas has some prohibitions on them.  Kansas, Oregon, Florida and Missouri do not allow them.

So, here’s a method that helps developers fund projects, lowers the price of housing and lowers the ongoing cost of property taxes for a home.  The instrument of this tool is recorded on the title of the property for all to see.  Tell me.  What’s not to like?

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  • 11 comments

    11 Comments so far

    1. Jake March 9th, 2010 1:15 pm

      Al,

      Finally a well thought out, positive, piece on private transfer fees. The groups you mentioned above seem to be exerting a major amount of energy to try and “ban” something that could actually help their industry. Makes you wonder, doesn’t it?

      Per one NAR blog, a 1% PTF would destroy the RE market. Wow!

    2. Stan March 9th, 2010 8:00 pm

      With the amount of new construction that has gone on over the last 10 years I wouldnt say infrastructure cost are really much of a barrier. Is there any other type asset that pays the original owner long after they’ve sold the asset? I think they are bad news!

    3. Jeff March 10th, 2010 6:42 am

      Great perspective. We are in an economic environment like no other. The commercial banks cannot survive the impending CRE defaults. Private Transfer Fees will put much needed liquidity into the system (It does not take much research to learn that the bank ARE NOT LENDING and many would rather take a massive loss than renew a CRE loan). Companies like Freehold Capital Partners are teaming up with devlopers to use this creative instrument to provide liquidity. What the folks that are against this concept clearly do not know / realize is:

      All Funds received must go to the banks if there is money owed on the projects. Think what impact that will have! Instead of tax payers supporting a bank from the top via TARP, this is a bottom up approach that will release an enormous amount of funds. The banks WILL start lending again. No cost to the taxpayers!

      This transfer fee is disclosed. If the developer does not have a combination of attractive price and amenities, the buyer will not purchase his / her product. Let the consumer decide!

      Millions of jobs will return. The developers will finish their projects and the banks will not be concerned about the impending CRE losses. The jobs that return will bring more with them. Lets see, job creation without paying billions of tax dollars for them, what a novel idea.

    4. Robert March 10th, 2010 7:01 am

      I agree with your assessment. People who pay the fee do so on property that they purchased voluntarily with knowledge that the fee was there. Free market at its best and far more democratic then a tax that they had nothing to do with being assessed on their property.

      If the public doesn’t like these fees then they wont buy the homes that have them. But if they want to sell their homes, try finding a realtor that won’t charge 6%.

      I agree as well that those that oppose the fees are not being genuine in their stated concerns. My belief is that their concern is to protect their fees and commissions, not to protect the consumer or the real estate market.

    5. Bob March 10th, 2010 7:47 am

      I lost a development property in 2009. If I could have implemented the program, I could have saved the property.

      The property is now foreclosed and all the existing homes in the development are severely depressed in price and marketability.

      Hopefully the NAR and ALTA are reading this. By stopping Private transfer fees from being implemented, the real estate market will continue to be suppressed with new foreclosures, banks will continue to fail because of the high number of REO properties and new development work (jobs) will not be created.

      Al, thanks for your positive perspective.

    6. Joe March 10th, 2010 10:01 am

      Very well said, Al. Private transfer fees are a brilliant solution at a time they are sorely needed!

      I guess I understand that ALTA is probably not wanting more work and responsibility without more pay. But, must ask myself why the NAR and ALTA are so insistent on shooting their members in the foot. The crunch is not over, and anything that helps with liquidity is badly needed to support market prices and sales activity. Low activity and low prices equal low revenue for all involved, including their struggling membership.

    7. Steve Majors March 10th, 2010 10:37 am

      The concept of Private Reconveyance Fees is not a new one – as you said, it has been used by environmental groups and others for many years, all with positive impact to everyone concerned.

      Within a struggling economy, why would anyone wish to block something that provides ‘from-the-ground-up’ solutions; bringing back jobs, stabilizing the developer’s situation with the banks and lowering overall costs to those looking to purchase property now?

      Private Transfer Fees Rights makes sense – in today’s economy and for the future.

    8. Al Lorenz March 10th, 2010 11:06 am

      I have an email into Freehold Capital Partners on one project that I could do right away with another a bit behind. I haven’t heard back yet, but I am looking forward to learning more.

    9. Brad March 10th, 2010 2:28 pm

      Seems to me that these reconveyence fees serve as a great tool to help stimulate underperforming projects (of which there are MANY in this economy) and keep money flowing throughout. I cannot see the negative in these fees.

    10. Victor March 10th, 2010 4:43 pm

      Al, I agree with you. Its a great idea. Lower home prices by taking out some of the upfront costs, and spread the costs out over time, paid by everyone who uses the subdivision. Its free market capitalism at its best! Why should I have to pay for 100% of the developer’s long term infrastructure costs if I’m only going to live there 10 years?
      Right now we are looking at massive foreclosures. I realize that some people out there might like to see developers go down, but keep in mind that when developers go down, BANKS go down, and property prices go down, and jobs go down, and our tax dollars go down the drain in bailouts. Even if a developer is well capatalized today and his project and loan is performing, its his neighbors project that goes into foreclosure and brings his project value down causing banks to audit his project and loan. Property values just keep spiraling down out of control in this environment.
      The reality is that developers need liquidity, and if they can get it from selling off a future fee in return for lowering the sales price today, then so what.

    11. jake March 11th, 2010 2:27 pm

      This concept works well in a performing market also.