A controversial real estate transfer fee collected by the Boston Redevelopment Authority has won a reprieve from the federal government.
The Federal Housing Finance Agency issued a proposed rule this week that would bar the lenders it oversees from investing in most mortgages with private transfer fee covenants. The covenants, typically inserted into a deed on the original sale of a home or condo, require a fee to be paid to a third party every time one of the units is sold. The covenants typically last 100 years.
The BRA pioneered the use of these covenants, mostly at condo projects around Boston, such as Flagship Wharf in the Charlestown Navy Yard. The covenants, which the BRA calls resale fees, allow the BRA to collect a percentage of the sales price every time a condo is resold. As CommonWealth reported in its Winter 2010 issue, the fees turn condo buildings into never-ending money machines, bringing several million dollars into BRA coffers each year.
In its proposed rule, the FHFA said it was opposed to any private transfer fee covenant where the money did not flow back in some fashion to the property from which it arose. “Traditional real estate law requires that, to be binding, a covenant running with the land must benefit the land that it burdens,” the federal agency said.
But the federal agency nevertheless granted an exception to its rule for any fee imposed or payable to a federal, state, or local government agency, paving the way for the BRA to continue collecting its resale fees. The Massachusetts Turnpike Authority and the MBTA have also begun collecting the fees.
The federal housing agency carries enormous clout because the lenders it oversees (Fannie Mae, Freddie Mac, and the Federal Home Loan Banks) provide the bulk of mortgage financing in the United States. Without their involvement, condo and home buyers would be unlikely to obtain financing for their purchases.
When federal officials last year initially broached the idea of cracking down on the transfer fees, BRA officials asked to be exempted. The officials argued that their resale fee allowed them to kickstart development projects by selling or leasing land to developers at a low upfront price and then recouping the true cost over time from future buyers.
Federal officials also granted exceptions for transfer fees paid to homeowner associations, condominium groups, cooperatives, and some tax-exempt groups that use the fees to maintain or improve encumbered properties.
The transfer fee covenants attracted little attention until recently, when private developers began attaching them to homes and condos they built in order to generate long-term revenue streams. Buyers complained, and a number of states outlawed the covenants or required greater disclosure to make sure buyers were aware of them.
Overall, the FHFA said in its proposed rule, the covenants do more harm than good for the housing market. “The transfer is simply an opportunity for the beneficiary of the fee to collect it, imposing a ‘toll gate’ that must be passed before the transfer may occur,” the FHFA said.
Before implementing its proposed rule, the FHFA plans to take comments over the next few months.