The General Assembly is considering a ban on a practice that is making at least one company millions: private transfer fees attached to real estate.
Private transfer fees, usually between 1 and 3 percent of a property’s value, are added to a property and assessed every time it is sold for up to 99 years.
In many cases, owners don’t know they’re required to pay the fee, sometimes to the property’s original owner and sometimes to an investor in the property’s development.
Senate Bill 234 would end that practice — and a lucrative business for New York-based Freehold Capital Partners, which bills itself as an investment firm.
Supporters of the bill say the company heavily invests in real estate development in exchange for a fee inclusion.
The General Assembly is acting just ahead of the Federal Housing Finance Administration’s effort to end the practice in any federally backed mortgage loan.
Freehold approaches subdivision developers and loans them cash to initiate development, construction of roads, sewage and power lines and other infrastructure. The company is promised the transfer fee for each house in the development in exchange for loan.
The company is operating in 43 states, though 23 have banned any further private transfer fees
“We’ve been told they have $360 million in investments in Colorado,” said Kathy Wanstrath, lobbyist for the Land Title Association of Colorado, one of the supporters of the bill. “We’re not sure where, because right now they don’t have to let people know the fees are attached to property.”
Freehold is lobbying the Securities and Exchange Commission to allow them to bundle the transfer fees and sell them as securities,Wanstrath said.
For its part, Freehold says the practice makes good business sense, allowing properties to sell at lower prices than those without the fees.
“Studies have concluded that it is illogical to ask initial buyers to shoulder 100 percent of the burden of long-term infrastructure costs,” the company said in response to FHFA’s proposed rule to ban private transfer fees from government-backed mortgages. “When these costs are embedded in the price of the home, the initial buyer must finance the costs … and pass these costs along to the next buyer.”
Freehold’s website also said future owners benefit from lower prices as well.
The company didn’t return calls from the Business Journal.
“A buyer paying less today will have lower acquisition costs, lower carrying costs over time, and the ability to sell for less,” the site said.
Transfer fees protect buyers, the company said. The practice allows investment in the comm.21unity, and allows developers to keep costs low.
But opponents to the practice — including the Colorado Bar Association, the Land and Title Association of Colorado and the Mortgage Lenders Association of Colorado — believe private transfer fees are unfair.
“What frequently happens is a homebuyer buys a house, lives in it for 10 years and improves the property in order to increase its worth,” said Terry Jones of the Mortgage Lenders Association of Colorado. “He sells it for a profit — but 1 percent of that profit goes to the company, who didn’t improve the property at all. They gain from other people’s ‘sweat equity.’”
The fees can be hidden, something else that SB 234 would change. The bill doesn’t ban current private transfer fees, but it does say they must be registered with the state and county..
Freehold said the only opponents are realtors and title insurance companies.
“…since fees collected by members of the National Association of Realtors and the American Land Title Association are all based on the price of a home, those two organizations are more than a little conflicted, and their criticism of these transfer fees lacks credibility,” the company said. “NAR members fear that a seller faced with a transfer fee will ask the real estate agent to take the fee out of their commission.”
Colorado must act quickly, Wanstrath said, because the federal government is moving toward issuing final rules prohibiting Fannie Mae, Freddie Mac and Federal Housing Authority loans from containing the private transfer fees.
“So a homeowner could find themselves stuck with a private transfer fee and unable to sell their property,” she said. “This really is a national movement against tpractice — 23 states already ban it.”
Title insurance companies oppose the fees because frequently, owners don’t realize the fees exist until they sell their home. The title search finds the fees, Wanstrath said.
“And that’s not fair to them, there’s a lien on their property,” she said.
Fees due homeowners associations are not included in the ban on private transfer fees, she said.
“The bill is targeted at third parties,” she said. “After July 1, no fee can be attached to a property unless ‘it touches and concerns the land.’ That’s the common law term. It has to benefit the property. Homeowner association fees clearly benefit the property.”
There are potential roadblocks to the bill’s passage.
The bill was introduced last week, and then was tabled to work on issues raised by the Homebuilders Association of Colorado. The association doesn’t oppose the ban on private transfer fees for residential property, but it does want a few things clarified.
“We have two remaining issues,” said Rob Nanfelt, executive vice president of the association. “We’ve had a lot of meetings, but we can’t seem to come to a meeting of the minds on these two issues. There are people who seem to think we’re up to something nefarious — but we aren’t.”
The sticking points include a clarification that nonprofit organizations set up with the transfer fees can remain in operation, even if their purpose doesn’t improve the immediate community. The other problem: an exemption from commercial to commercial transactions.
“Those transactions are done by people who are used to complicated, sophisticated real estate transactions,” Nanfelt said. “They know what they’re getting into.”
The bill’s drafters are drafting amendments that would allow the homebuilders’ association to support the ban. If they can’t, Jones is afraid the bill will die.
“We’re working with them, and we’re hoping to get it through before the end of the session,” she said. “Federal rules are pretty much imminent. We need to act so Colorado’s real estate sales don’t get bogged down.”
Number of homes with private transfer fees nationwide
(source: Freehold Capital Partners)
Amount of Freehold investments in Colorado
Number of states banning private transfer fees
percentage of government-backed home mortgages through Fannie Mae and Freddie Mac