A private transfer fee (“PTF”) — also known as a reconveyance fee instrument — is a financial instrument where a developer adds to a covenant, a deed, or home purchase contract requiring a percentage of a home’s sale price (usually 1%) be paid every time the property is sold, typically for 99 years. To view a sample PTF click here. PTFs typically provide they may not be terminated after the initial sale of the property except by the original developer.
The Case Against Private Transfer Fees
The American Land Title Association and the National Association of REALTORS® have taken the position that PTFs lower home resale values and add another layer of difficulty to selling a home. They feel that PTFs effectively lower the amount of equity an owner has in his or her home.
PTFs have been banned in Arizona, Florida, Kansas, Iowa, Maryland, Minnesota, Missouri, Oregon, Texas, and Utah. Hawaii, Illinois, and Louisiana have PTF bills awaiting the governors’ signature. PTF bills are also pending in Alabama, North Carolina, Rhode Island, and South Carolina. In California, sellers must disclose PTFs. At the Federal level, the Federal Housing Administration (FHA) will not insure home loans which carry private transfer fees. HUD’s general counsel has confirmed that PTFs violate HUD’s regulations, which prohibit legal restrictions on conveyance (defined to include limits on the amount of sales proceeds retainable by the seller).
PTFs in Colorado
Colorado neither bans PTFs, nor is there any legislation pending that would do so. Summit County, Colorado, permits a PTF if it is related to and offsets the payment of an environmental “impact fee” that is required of all developers in the County.
The Case For Private Transfer Fees
Developers argue that PTFs are necessary to offset the costs of developing a common interest community. In order to get their projects approved, developers must often satisfy significant demands from environmental groups that cost thousands of dollars. These costs could result in significant increases in new home prices. If developers had to pass these costs on to the original buyers, many potential homeowners could be shut out of the market. Developers argue that spreading the costs out among future buyers is the fairer approach. Some environmentalist groups also favor the use of PTFs, which can be used to preserve open space, wetlands, and animal habitats.
Developers have also argued that future owners of a property benefit from a PTF covenant because property encumbered by a 1% fee should sell for less than property without a fee. They argue that a buyer paying less at the time of purchase in return for paying 1% at the time of a future sale will typically have lower carrying and acquisition costs. Of course, this position essentially characterizes the reduction in value of a home as an advantage. When the owner is looking to resell the property, they will likely have to do so at a lower price. A lower price realized from a sale is less appealing to most owners.
What Do You Think?
Are PTFs necessary to incentivize developers to continue to develop common interest communities, or are they an unreasonable “restraint on alienation”? Is the fee a private tax? Does the covenant run with the land such that it can bind future purchasers? Or are they unenforceable personal covenants which do not run with the land and therefore are not binding on future purchasers? What do you think?