Resale Fees That Only Developers Could Love - NYTimes.com.
What a story! The developers of some subdivisions have slipped into their covenants a 1% resale "commission" which anyone who sells a property they developed must pay them ... not just once, but at every transaction for 99 years! How's that for a tax imposed by the private sector? Here are some excerpts from the article.
"But four months later, when a local television reporter was doing a story on housing taxes in their subdivision, the Dupaixs discovered that their sales contract included a “resale fee” that allows the developer to collect 1 percent of the sales price from the seller every time the property changes hands — for the next 99 years. ....
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 the Dupaix 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.
The fee, sometimes called a capital recovery fee or private transfer fee, has been gaining popularity among companies that have been frantically searching for new ways to gain access to cash in the depressed housing market. ...
Freehold Capital Partners, a real estate financing firm founded by the Texas developer Joseph B. Alderman III, has been leading the charge. According to William White, Freehold’s chief operating officer, the firm has signed up more than 5,000 developers who are adding the covenant to developments worth hundreds of billions of dollars that will be built out over the next decade in 43 states.
Many developers see the resale fee as a creative way to get new financing. They are hoping to one day use the trickle of cash from these fees as collateral for a loan, or to get cash up front if pools of the fees are packaged into securities to be bought and sold on Wall Street. Freehold has begun shopping the idea of securitizing the resale fees, much as subprime loans were packaged and sold to investors.
Someone selling a home for $500,000, for example, would have to pay the original developer $5,000. If the home sold again two years later for $750,000, the second seller would have to pony up $7,500 to the developer, and so on. Even if a home declines in value, the seller still must pay the 1 percent fee. Freehold gets a cut of the resale fee; if the fees are securitized, it retains a percentage of the cash generated from the securitization.
Freehold’s principals and lawyers have been aggressive in sales pitches to developers, but have declined to give details on their clients, securitization efforts or the company itself. Freehold moved its corporate office from Round Rock, Tex., to New York this year as it stepped up efforts to securitize the resale fees.
Mr. White characterizes the resale fee as a win-win deal for the developer and the home buyer. The fees let developers spread out the cost of building the roads, utilities and other infrastructure across all homeowners in a subdivision, rather than just the initial buyers. As a result, he said, the developer can lower the initial price of a home to the first buyer.
For example, he says, a typical $250,000 home may be able to sell for about $5,000 less. “The fee is a fair and equitable way to spread development costs, and results in lower costs to the average consumer,” Mr. White says. ...
Jeff Moseley, founder of Badger Creek Development in Brunswick, Ga., says he signed up with Freehold after watching his business tank with the economy. “I can’t sleep at night,” he says, adding that he had laid off all 32 of his employees.
He is hoping Freehold’s resale fee program will breathe new life into his business. “I thought it was an intriguing and compelling story,” says Mr. Moseley, who owns two development projects, encompassing about 220 lots.
Under his deal with Freehold, he will get about two-thirds of the revenue from the securitized fees while Freehold and other parties will get one-third. ...
A COALITION of real estate trade groups, including the National Association of Realtors, the American Land Title Association and the Center for Responsible Lending, opposes resale fees and is lobbying federal and state authorities to ban them.
“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,” says Justin Ailes, director of government affairs at the land title association. The fee could hurt real estate values in the future if buyers are reluctant to purchase properties that have a 1 percent fee attached. ...
The Federal Housing Finance Agency is considering a proposal to prohibit the transfer fees on all mortgages financed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. And 17 states have either banned or placed conditions on the practice.
Some bankers say Freehold will have a tough time selling the idea to Wall Street. The uncertain economy and housing market have made it next to impossible to predict when and how often a home will sell, or where home prices are headed — information that is needed to estimate cash flows to value the securities.
And some worry that an all-out ban of resale fees by states or the federal government could make the securitized paper worthless.
Dave Ledford, a senior vice president at the National Association of Home Builders, says he’s not sure Freehold can deliver on its big promises. “It’s almost in the category of ‘too good to be true,’ ” Mr. Ledford says.
Mr. White dismisses the criticism as sour grapes. He contends that Realtors oppose the fee because homebuyers might pressure them to lower their commissions to offset it. “Apparently 6 percent to a Realtor is justified, yet 1 percent to pay for roads and utilities isn’t,” Mr. White says. He says he believes title companies are worried that they might face legal claims if they miss the fee during a search.
LVTfan here: 1% to pay in 2050 or 2090 for roads built in 2010? Right .... Tell us another one.
See also http://www.wealthandwant.com/docs/Gross_Rent.html Rent-seeking is alive and well -- and these folks are reaping what they didn't sow -- and won't sow. It doesn't come out of thin air. It will come out of the pockets of future owners and users of the property.
Shouldn't we-the-people -- the public sector -- get that benefit?
This seems a bit like the Baltimore land rent story: private parties getting to collect value today, in return for someone paying a bit less 50 or 100 years ago to buy a house.
And both situations ignore what those who have read Henry George know: that land rent ought to be used by the commons to finance our common spending, not privatized by any individual or corporate entity.
Little people pay the taxes ... and we're paying to the wrong parties. When private entities get to collect what we-the-people create, there's something badly wrong with the structure. It forces us to rely on sales taxes, wage taxes, building taxes, and other taxes which burden the economy and steal from those who produce in order to enrich those who speculate in land value.
Wise states will implement the legislation necessary to wipe out such structures.
Comments