Monday, March 8, 2010

Increasing Trend Of Transfer Fees Placed In Covenants And Restrictions

Updated March 9th, 2010.

There is an alarming trend involving the covenants and restrictions developers are placing on properties called a "transfer fee."  Essentially, the developer writes into the covenants that at each time the property is sold over the next one hundred years, a certain percentage must go back to the developer or investor partners, essentially generating income for the developer years after the original sale.

According to an article at the Daily Herald, National Association of Realtors and the American Land Title Association have already come out against this issue, asking legislators to prohibit or limit these private mandates on property.  Even the National Association of Home Builders is weary of such fees.

"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."

Proponents of the fee tout that it is good for both consumers and builders because, in theory, the transfer fee will allow developers to recoup "infrastructure costs," such as project amenities, environmental protection and land use requirements imposed by local governments, without imposing the high costs on the property up front, allowing for properties to be sold for less.  Builders can then sell the rights to the transfer fees to investors who may purchase the revenue stream at a cost.

Critics of the fee claim that it will lower property values and make houses with fees tied to their property hardy to sell.  There is also question as to whether or not these fees will be disclosed to consumers at the time of purchase as well as how payments, if any, will be made in the future, which could have the potential to hold up land sales.

While some states limit or ban the practice, there are still numerous that don't - 44 to be exact.

The problem I see with this is that I do not see initial costs to the consumer being lowered by much, if by any. If a fee is placed, say 1% on the resale value over the next 99 years, in order to recoup developmental costs, and then the developer is to monetize the fee to a bunch of investors, they may not get the potential full value of their "infrastructure costs" back as compared to selling a home with the costs already included, leaving the property to be encumbered for years with eventual fees. I can also imagine that developers will use this fee to hide their actual costs and profit margins, claiming to be selling at a reduced cost because the transfer fees will recoup the expenses but in reality just using the fees to just make more, and from people they will have no dealings with in the future.

Similarly, Sand Lake Hills Homeowners Association (SLHHOA), as well as other associations had done similar things using covenants and restrictions to ensure revenue streams from properties. SLHHOA, when rewriting their covenants, created an additional article titled "Assessments," which placed a liability on each property, regardless of membership, requiring property owners to pay any amount at any given time. The association also created something called an "initial assessment/transfer fee" that requires new property owners to pay the association a sum of $250 dollars in addition to any other assessment upon transfer of the title. Any transfer also forces new owners to become members of the association, and then in perpetuity, become liable to the corporation for ever.

Interestingly enough, Florida, the state where SLHHOA exists, bans the practice of transfer fees.  Although the statute excludes "assessments" and "fees" payable to a homeowners' association,  I believe that the section is present to differentiate between the typical assessments and fees permitted in covenants and restrictions from transfer fees.  While the language may appear to be vague, my interpretation of the intent of the statute is to exclude normal fees from the restriction to avoid conflicts with other statutes.  There are also some other issues regarding the SLHHOA - mainly that it is not the legal HOA of the surrounding neighborhood it wishes to collect from.

Essentially, this is just another example of creative developers and interested parties establishing a steady stream of income with no work on their part, so essentially, they had written into the rules of the property a way for them to get free money.


  1. Kevin, I don't see this as a way to reduce frint end costs. I see it as another way for developers to slip a hidden hand in our pockets.

  2. Exactly...

    The biggest problem is that people will sooner or later forget, or figure that 1% of the resale value seems too small to complain, but when you consider the larger scale, with billions of dollars of real estate effected, the amounts to be made by developers just sitting on their hands is ridiculous...


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