We've gotten used to them -- the fee airlines charge to check your bag (or the fee that they charge for your carry-on), the fee for parking in a previously-free lot, the fee for ... you name it.
But yesterday's New York Times introduced me to a new fee: the "resale fee" (or "capital recovery fee" or "private transfer fee") that some real-estate developers are charging, permitting them to collect 1% of the sale price every time the property changes hands, for up to 99 years. [Full article, by Janet Morrissey, here]
A growing number of developers and builders have been quietly slipping "resale fee" covenants into sales agreements of newly built homes in some subdivisions. In ... [one particular] contract, the clause was in a separate 13-page document -- called the declaration of covenants, conditions and restrictions -- that wasn't even included in the closing papers and did not require a signature.I find it hard to believe that I'd be legally liable for a fee that I haven't been told about and that I don't have to sign for, but let's ignore the legality for a moment and think about the ethics.
I'm not alone in having ethical qualms about this, fortunately. Morrisey quotes Justin Ailes, director of government affairs at the American Land Title Association: "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."
The concept is also opposed by the National Association of Realtors and the Center for Responsible Lending, among others.
Developers, apparently, see this "as a creative way to get new financing."
In fact, according to the chief operating officer of Freehold Capital Partners, it's a "win-win deal" for developers and home owners, because "the fee is a fair and equitable way to spread development costs [including building roads and other infrastructure], and results in lower costs to the average homeowner."
The home page for the Freehold Capital Partners website has a link for a brochure with more information on "capital recovery fees" which are described as "a real estate financing solution designed to more efficiently structure the economics of real estate projects." Who could argue with so laudable a fiscal goal?..... Just give me a second.
Now, no one can deny that some developers, like some homeowners, are currently upside down on their loans and are in deep financial trouble.
But neither can anyone deny that this is a singularly shady way to try to get out of the situation.
There are plenty of homeowners who rode the surge in home prices upwards by flipping a series of houses, and are now holding the bag and crying for help. Since they're not as essential to the overall economy as the major banks who encouraged them in this risky behavior, the homeowners are not likely to get much of a government bail-out. Whether they should is a topic for another day.
Should the developers be eligible for government help? That too is another issue.
But, to use Ailes' "smell test", the developers' "resale fee" is the wrong way to go.
In one example the Times used, not only did the homeowners not learn of the resale fee until after the closing, but even the home builder was not aware of the fee.
Even if a prospective owner learns of the fee at the time of the closing -- does that strike you as fair? Given the number of houses a prospective buyer has probably visited, the negotiations that he or she has gone through to reach an agreed-upon price, the inspections and banking arrangements, and everything else that's involved in buying or selling a house, this fee seems like adding insult to injury. Moreover, given that a standard mortgage is 20% down (sometimes less), a 1% resale fee will amount to 5-10% of the buyer's downpayment -- which is significant, and not something to be thrown at you when you're signing the final papers on your dream house.
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The main purpose of the transfer fee program is to create financing to get the real estate and building industries back on their feet again by generating jobs to revitalize the economy. A secondary benefit is to help spread out the costs of the infrastructure facilities over 99 years instead of charging the costs to the first homebuyer. In California there is a Mello Roos tax which is added to the annual property taxes, payable each year equal at approximately 1% of the original cost of the property plus your normal property taxes. A transfer tax paid ten times over 99 years would be considered a huge bargain.
ReplyDeleteA transfer fee is a way to create financing in a destroyed real estate market. A financial source, such as Wall Street or the U.S. government, lends a builder funds to re-start their existing projects. They fund these projects because they will earn back their invested dollars from the transfer fees. The transfer fees do not go into the builder’s pocket – they pay back the investor, (Wall Street – The U.S. government).
In most regulated states there are no surprises about hidden transfer fees when you purchase or sell a home. It is a recorded document that all parties sign-off on at point of sale – with full disclosure by all parties. The purpose and fiduciary duty of a title company is to insure that all parties are fully aware of these fees. There are no surprises.
Dear "Doc",
ReplyDeleteThanks for your comment. I think we will have to agree to disagree on the ethics of this fee.
I understand that the entire real-estate market is in disarray. I have a little more sympathy for the homeowners who are underwater than the developers, but I have some sympathy for them too.
I am unfamiliar with the California tax to which you refer. I do agree it sounds like a bad deal -- but the transfer tax is still a bad deal too.
I did not comment on the legality of the fee (I'm not a lawyer), but only on the ethics. Even if the buyer is informed at the time of sale -- and the Times reported cases where they were not -- this is, effectively, springing yet another cost on a party who thinks he or she has calculated all the costs already. And that's just wrong. Note that in the primary case that the Times used, even the home _builder_ was not aware of the fee.
Moreover, developers who have not been able to figure the costs of infrastructure building into their initial plans might want to look into another line of business.
Best regards,
Rose-Anne