Share |      

Private Transfer Fees: They’ve Made the News—But Are They News?

Private transfer fees (PTFs) are either (i) an ingenious business model created by property developers to help defray the purchase price of a residence; or (ii) a deceptive consumer ripoff of the unwary homeowner.

What are PTFs?

A builder who is creating a residential development can put covenants or restrictions in the deeds to the new homes. The restrictions might be mundane, such as “No outdoor laundry-hanging,” cosmetic, e.g., “All front doors must be blue,” or safety oriented: “No barnyard animals.” A buyer who buys such a house is bound by these rules. Short of court intervention, they are included with the land transaction from seller-to-buyer in perpetuity.

A relatively small number of developers have used the covenant model to bind buyers of their homes (and all subsequent owners) to pay back to the builder a certain specified transfer fee every time these houses changed hands. Most of these covenants last for 99 years from the date of the builder’s first sale.

Like the “blue doors” rule, this runs from seller-to-buyer for the 99-year term.

This fee creates a 99-year income stream to the builder (and his heirs, after his death). Builders who have created PTFs also have had an opportunity to work with financial services companies to structure different models of PTFs.

Several states have banned PTFs. Pennsylvania and Texas took this step earlier in 2011. Most noteworthy, the Federal Housing Finance Agency (FHFA) published a proposed rule in February 2011 that would prohibit Fannie Mae, Freddie Mac, and Federal Home Loan Banks Board lenders from lending on PTF-encumbered properties on which the PTF was put in place after February 8, 2011. The proposed rule garnered many written comments and is currently being revised by the FHFA. Its date of final publication is not known, nor is it known whether the final rule will embody the February 8, 2011 cutoff date.

Where does this quilt of bans and proposed bans leave us?

First, how much of our housing stock is burdened by PTFs? An informal poll done by Cartus’ title and closing affiliate, TRG,  shows that of 15 closing offices that were canvassed, none had handled a home with a PTF. In my own 30 years as a lawyer and 20 years here at Cartus (and its predecessors), I have never seen a home with a PTF or seen a claim involving a PTF. So while they do exist, and are not merely an urban legend, it would appear that they are far rarer than the recent spate of legislation and press would seem to indicate.

Once the FHFA decides upon its cutoff date, we can expect builders to entirely discontinue inclusion of new PTFs in developments. Otherwise, the only buyers for such housing will be cash buyers.

We will keep our readers apprised of future developments related to this issue.

Share |      

Bruce Perlman
Posted by
Bruce Perlman
July 25, 2011

Bruce Perlman

Bruce joined Cartus in 1991 and was named senior vice president and general counsel in 2001. He has lectured extensively and written many articles on tax and legal topics related to global relocation issues.

Post a Comment

Thank you for your submission. Submissions are moderated and generally will be posted if they are on-topic and not abusive.

Your email is never shared. Required fields are marked *

* | Terms of Use | Privacy Policy | © 2015 Cartus Corporation