DC METRO RESALE FEES

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FAQ on Developer’s ‘Resale’ or ‘Private Transfer Fees’

What is a Resale Fee?

DC Metro Resale Fees may  have a number of different names: private transfer fees, reconveyance fees, recovery fees, capital recovery fees, and resale fees. They all amount to a private transfer fee paid to a developer, HOA or individual at closing each time a property is sold over a period of time. The transfer fee is attached to the property as a covenant and usually runs for a set period, often 20 or 99 years. While developers say it is a way to spread improvement costs over a longer period, opponents believe private transfer fees decrease affordability, increase potential liability, and provide no benefit to property purchasers of the community in which the property is located. As of late 2011, over 30 states have either banned or placed conditions on the practice and Fannie Mae and Freddie Mac have made statements saying they won’t back mortgages containing the fees.

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The H.R. 6260 Bill

BILL H.R. 6260 In 2010, a bill was introduced in Congress (H.R. 6260) to outlaw private transfer fees at the federal level, but was not passed. FHFA Rule Eliminates Private Transfer Fees by Jann Swanson Feb 2 2011 The Federal Housing Finance Agency (FHFA) has issued proposed rules regarding private transfer fees on properties securing mortgages intended for sale to Fannie Mae, Freddie Mac, or Federal Home Loan Bank members. The rules reflect the agency’s response to 4,210 letters commenting on a “proposed guidance” outlining the issue in August 2010. The wave of comments came from interested parties that included legal and trade associations, conservation and other non-profit organizations, condominium associations, title companies, developers, and state and local government. Transfer fees are contractual arrangements where an owner pays a fixed amount or a percentage of the sales price at the time of transferring the property. The transfer fees in question are collected by third parties each time a property changes hands. The fees are memorialized in deed covenants and may benefit a homeowners’ association, conservation land bank, non-profit organization or any number of other entities. They are also used by builders and developers to provide themselves with an income stream long after a development is complete. FHFA proposed enacting restrictions on transfer fees because of concerns that they could: Increase the costs of home ownership and reduce liquidity in both primary and secondary mortgage markets; limit property transfers or render them legally uncertain; detract from the stability of the secondary mortgage market, particularly if such fees will be securitized; expose lenders, title companies, and secondary market participants to risks from unknown potential liens and title defects; contribute to reduced transparency for consumers because the fees often are not disclosed by sellers and are difficult to discover through customary title searches, especially after repeated purchases; represent dramatic, last-minute, non-financeable out-of-pocket costs for consumers; deprive subsequent homeowners of equity value; and complicate residential real-estate transactions and introduce confusion and uncertainty for home buyers. Comments received by FHFA fell generally into five categories: Advocating a complete ban on private transfer fees. Advocates said these fees increase the cost of homeownership while generating revenue for developers or investors who provide no benefits to the homeowners over time. These comments also noted that there are few binding requirements for disclosure of these fees at closing which adds to the complexity of real estate transactions. Advocating for private transfer fees for condominiums, cooperatives, and homeowners associations. Commenters maintained that private transfer fees fund the capital reserves of their communities, helping to fund improvements which increase property values, lower member fees, and that these fees are fully disclosed. Advocating for private transfer fees for tax-exempt nonprofit associations that provide direct benefits to the property and advocating for government and other entities that provide benefits to the community at large. These commenters asserted that certain non-profit organizations and agencies play important roles by supporting the creation and maintenance of community enhancements such as open space, environmental conservation, and preservation, affording housing, and transit improvements. Some comments supported fees even if they did not directly benefit the subject property. Supporting the payment of such fees to for-profit entities and also supporting the securitization and sale of transfer-fee income streams to investors. These commenters claim that transfer fees raise the same objections and confer the same benefits across the spectrum of the entities that might collect them. They also argued that transfer fees lower the cost of construction by spreading it over future buyers. Level of fees. FHFA had expressed concern about the reasonable level of fees, whether they were fixed over the life of the covenant, and if they were proportional to the benefit rendered. Comments generally urged FHFA not to consider this issue. Compliance. Commenters, primarily banks, expressed concern about their ability to compliance without excessive burdens; particularly accessing underlying documents regarding existence of such fees. Prospective Application. Concern was expressed that the final rules might be retroactive, affecting closed loans that had not yet been securitized, complicating title searches, and impacting the salability of properties with existing covenants. In response to the comments, FHFA’s proposed rule would: Exempt from the rule private transfer fees paid to homeowners associations and similar organizations and to tax-exempt non-profit organizations where the fees are used to the direct benefit of the encumbered property. FHFA will not exempt fees paid to non-profit organizations that do not provide a direct benefit to the property on the basis of traditional law that a covenant running with the land must benefit the land it burdens. Be prospective, applying only to private transfer fee covenants created after the publication date of the proposed rule. Allow an implementation period of 120 days for the regulated entities which may use reasonable means to achieve compliance with this rule. Make no attempt to consider or evaluate the level of private transfer fees.

Virginia Legislation

Legislation Prohibiting Private Developer Transfer Fees SB 931 Transfer fee covenants Some developers have attempted to secure future revenue streams by recording a 1% transfer fee, payable to the developer each time a property is sold for 99 years. This legislation prohibits such transfer fee covenants from being recorded in Virginia on or after July 1, 2011. Property Owners’ and Condo Associations may still enact these fees, as they are approved by and for the benefit of association members. Read the VA legislation text

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Information is believed to be accurate, but not guaranteed. Subject to change without notice. Realtors are not CPAs or attorneys and are not permitted to give tax or legal advice or interpretations. Refer to a tax or legal professional for all related matters. Any information provided on this site pertaining to such issues is not intended as tax or legal advice and is provided solely for the purpose of illustration. Resources cited are believed to be accurate but are not guaranteed.
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