Transfer Fees are Beneficial if Disclosed

Sept. 16, 2010 - PRLog -- September 13th, 2010


         The New York Times printed an article on Sunday, September 11th entitled "Resale Fees That Only Developers Could Love."  The article describes an innovative financing tool (called a private transfer fee or a capital recovery fee) that has been gaining popularity among developers and builders.  The article mentions specific developers who see the Freehold program and capital recovery fees as one way of dealing with declining prices and underwater projects.  For instance, the article describes how developer Ted Thieman "signed up with Freehold last year after lenders refused to provide financing for him to develop land in Dayton, Ohio."  It is clear how private transfer fees can help developers, save projects, and thus create much needed liquidity in today's tight market; the bigger question the article raises, and then answers, is how private transfer fees affect home buyers.

         The article refers to a specific home buyer (the Dupaix family) who purchased a home in March 2009, encumbered by a private transfer fee covenant.  Mrs. Dupaix says that she did not know about the private transfer fee at the time of purchase, but that if she had known, "we would have negotiated to get the price lower."  Mrs. Dupaix's response makes sense, completely dispels the criticisms leveled by special interest groups, and shows exactly how these private transfer fees can be beneficial to all parties that are involved in a real estate transaction.

         As Mrs. Dupaix's clearly shows, the market will adjust to the existence of any type of encumbrance, so long as the encumbrance is properly disclosed.  A home with a properly disclosed fee simply gives buyers the opportunity to purchase homes at a lower price today, in exchange for the future obligation to pay a transfer fee upon sale.  Why would people be against such an opportunity?  If a developer can create an asset to recover expensive capital improvement costs over time, buyers will be able to buy homes for less.  Ms. Dupaix did not have the opportunity to negotiate a lower price because the title company was negligent.  This negligence is, of course, the reason the title industry opposes these fees:  its about their profits – not homebuyers.  However, as the Times article showed, the Instrument was boldly titled, and not embedded within complex documents.  Despite the title company missing the instrument, the developer, and Freehold, readily released the fee from the property.  

         The Coalition of real estate trade groups that the article mentions should lobby for properly disclosed private transfer fees, not a ban on private transfer fees.  Realtors, who are part of the Coalition, have candidly stated that they oppose private transfer fees because encumbrances tend to have a depressing effect on their commission, yet publicly they couch this as a consumer issue, apparently recognizing that a complaint about commissions would fall on deaf ears.  Whether or not Realtors and Title Companies have their own reasons to oppose properly disclosed fees, the market should recognize the societal benefits of transfer fees.  The article has a quotation from Justin Ailes, director of government affairs at the land title association, who stated “The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn't pass the smell test.”  Mr. Ayles ignores the fact that the improvements installed by the typical developer will last 99 years or longer, and he ignores the fact that the typical home will sell 8-10 times over 99 years, generating 8-10% for the developer who actually built the master planned community, but significantly MORE for the realtors and title industry.

         If collecting revenue for up to 99 years means a lower price for the buyer today, and results in otherwise unavailable financing that allows for more construction jobs (in order to put in proper infrastructure), why is it troublesome?  Again, the benefits of such fees rely on proper disclosure, and thus private transfer fees that are not properly disclosed should be banned.  However, it would be careless to object to a tool that can benefit so many parties when disclosed properly, simply because "it doesn't pass the smell test."

The full New York Times Article can be read
at http://www.nytimes.com/2010/09/12/business/12fees.html?sc...

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