Transfer Fee Covenants In the News

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            There is currently a major battle being fought over the use of real estate transfer fees. These fees are also often called resale fees, initiation fees, and community enhancement fees.  In essence, these are payments that are required upon the transfer of property. 

             These transfer fees have actually been around for years, some of the earliest being created in California and Texas and the fees most often being found in larger master planned communities.  In their original form, the fees require payment to a community association or a 501(c)(3) entity with responsibility for providing cultural, environmental or other benefits to the community where the property is located.  For example, Seaside, an upscale resort master planned community in Florida. employs a transfer fee to fund a 501(c)(3) entity.  This foundation uses the funds to foster arts, environmental protection, and cultural events for the Seaside community. 

  Over time, a new version of this concept evolved in which the transfer fee payment was directed to the developer of the property for a 99 year period.   Eventually it evolved into the concept of bundling the rights to these payments and securitizing them. 

The concept was not popular in Georgia until the real estate meltdown occurred.   Then, facing bankruptcy, developers found the concept of being able to add a covenant to their properties that would pay them ready cash a strong lure. 

It has risen in popularity in other states, so much so that the States of Arizona, Florida, Iowa, Kansas, Maryland, Minnesota, Missouri, Oregon, Utah, Alabama, Hawaii, Illinois, Louisiana, Ohio, Rhode Island, and South Carolina have all enacted or are considering legislation that prohibit transfer fees that are payable to Declarants/developers/third parties (but note that these statutes still allow transfer fees payable to associations or that “touch and concern” the land).  California, interestingly, does not prohibit such fees but requires substantial disclosures for for-profit private transfer fees.

 The tide against these types of fees has risen to the extent that the Federal Housing Finance Agency is in the process of promulgating a rule that would prohibit Fannie Mae, Freddie Mac, and FHA from making loans in communities with any type of transfer fee.  The comment for the rule ends October 15, 2010. 

Groups, such as the Community Associations Institute , are mobilizing to advocate against the adoption of the rule as currently proposed.

 If passed, it could be devastating for many communities, as existing transfer fees would be very difficult to remove.  Without the ability to sell their homes to people who use conventional mortgages to finance their purchases, the rule could conceivably bring real estate sales to a screeching halt in both struggling communities and others that were just surviving the economic downturn.

Related Articles

• Ban on transfer fees could hit community associations hard (seattletimes.nwsource.com)
• American Land Title Association Applauds U.S. Representatives for Introducing Bill Protecting Consumers from Harmful Private Transfer Fees (eon.businesswire.com)
• Coalition targets long string of transfer fees (seattletimes.nwsource.com)
• Community Associations Oppose FHFA Transfer Fee Ban (prweb.com)