Feds taking aim at real estate fees; BRA seeks guidance
A novel real estate fee long collected by the Boston Redevelopment Authority, and more recently by some private developers, is coming under fire from the federal government.
The Federal Housing Finance Agency is urging the lenders it oversees to stop investing in mortgages with private transfer fee covenants. The BRA calls its fee a resale payment, but it operates the same way. Language inserted into a deed on the original sale of a home or condo requires all future owners to pay a fee to a third party when the property is sold.
The BRA collects payments ranging from 1 to 4 percent of the sales price every time a condominium or building is sold to a new owner at about 25 locations across the city. CommonWealth previously dubbed the arrangement a “never-ending money machine” (“Money machine,” Winter ’10).
Homeowners associations, land preservation groups, and, more recently, private developers have inserted language into deeds requiring all future purchasers to pay 1 percent of the sale price. Two Massachusetts transportation agencies have also assessed the fees on properties they sold.
If adopted after a comment period, the policy would make it nearly impossible for developers to attach the covenants to mortgages since any potential buyers would probably have a problem obtaining financing. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are huge players in US mortgage markets, providing nearly $6 trillion in funding.
Susan Elsbree, a BRA spokeswoman, says the language in the federal guidance is unclear. She says the BRA intends to ask the Federal Housing Finance Agency to clarify that its proposal would not apply to transfer fees payable to public entities like the authority.
“Unlike some private developers, who have used transfer fees to build additional profit into projects, the BRA uses these fees to help generate housing development in targeted areas by reducing up-front land costs and also to continue urban renewal efforts in the city,” Elsbree said in a statement.
Michael Parker, a Boston-based land use lawyer who owns a condo at Flagship Wharf in Charlestown that is subject to the BRA fees, says the federal guidance is very broad in scope. “If I was the BRA, I’d be very concerned about this proposed guidance,” he says.
The BRA, a self-sufficient government enterprise, relies on resale payments to help balance its budget. Revenues from the payments tend to rise and fall with the economy, but typically hover in the range of $1.3 million a year. At Flagship Wharf, one of the first properties in Boston to be subject to the resale payment, the money machine has been working since the early 1990s. One of the penthouse units there has sold five times, yielding nearly $90,000 in resale payments for the agency.
The BRA says the fees allow it to kick-start projects by taking less money up front for land it sells, leases, or clears for development, which makes it easier for a project to get off the ground. The BRA says it recoups its money over time from subsequent condo owners who weren’t involved in the original deal. Condo owners often grumble about the fees, and several have said the payments are an illegal form of taxation, but the BRA says state law gives it the right to impose the fees.
Federal officials declined comment on their proposed guidance until the comment period expires. Some of the concerns expressed in the guidance focus almost exclusively on fees assessed by private developers, but others would also apply to the BRA fees.
“Encumbering housing transactions with fees that may not be properly disclosed and that may limit the alienation of property means that such fees may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages so encumbered,” the guidance says. “FHFA is concerned that such consequences will have a particularly detrimental effect on still fragile housing markets.”
Comments filed with the federal agency indicate the fees are strongly opposed by real estate industry officials but supported by property owner groups and land preservation organizations that often use the fees to support their efforts.
The Hilton Head Plantation Property Owners’ Association of South Carolina said in its testimony that it uses transfer fees to help fund its operations and provide upkeep for properties. The association said the measure would cost it $300,000 a year.
“This reduction in association income means our homeowners will face higher association assessments, a reduction in the services that attracted them to our community in the first place, or both,” wrote T. Peter Kristian, general manager of the property owners’ association.The Florida Realtors organization backed the federal guidance, calling the fees “not prudent or safe or sound investments.” Wendell Davis, president of the group, said concerns about the fees prompted Florida to join a handful of other states in passing state laws that prohibit the imposition of such fees. (Massachusetts doesn’t have a similar law.)
“Private transfer fees increase the cost of homeownership, do little more than generate revenue for developers or investors, and provide no benefit to homebuyers,” Davis wrote. “They place an inappropriate drag on the transfer of property. There is virtually no oversight on where or how proceeds can be spent, on how long a private transfer fee may be imposed, or on how the fees should be disclosed to home buyers.”