BILL ANALYSIS
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 670
SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: correa
VERSION: 4/11/07
Analysis by: Mark Stivers FISCAL: no
Hearing date: April 17, 2007
SUBJECT:
Real estate transfer fees
DESCRIPTION:
This bill generally prohibits the prospective imposition against
real property of any condition requiring the payment of a
private fee upon transfer of the property.
ANALYSIS:
Since 1872, current law has provided that any condition
restraining the transfer of real property, also referred to as
alienation, is void when repugnant to the interest created. In
Morris v. Allen (1911) the court described this section as "an
expression of the policy of the law declaring conditions
accompanying the absolute transfer of property and attempting to
restrain the subsequent sale or alienation thereof to be void."
This provision has been used, for example, to void a clause in
a grant deed prohibiting the grantee from further conveying the
interest in the property without the grantor's consent.
Current law does allow, however, various required fees to be
included in the price of a residential real estate transfer.
These include public fees such as transfer taxes and document
recording fees as well as private fees such as homeowner
association processing fees. All of these required fees and
payments must be disclosed on statutorily required forms. In
addition, various types of voluntary fees, including escrow
fees, title insurance premiums, and realtor commissions, as well
as liens, including mechanics' liens, judgment liens, and lender
liens, are all paid out of escrow.
Recently, a new type of fee has been employed in certain
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situations: a private real estate transfer fee. Such a fee was
first devised in Roseville three years ago when a project
developer and the city agreed to a legal settlement with
environmentalists allowing for the development of 8,400 new
homes on the city's last large expanse of vacant land while
preserving nearly 6,000 acres of open space. The $85 million
needed to purchase the agreed-upon open space will come from a
charge of % of the sales price each time a home within the
development is sold over the next 20 years. The fee goes to the
private, non-profit Placer Land Trust for the purchase of the
open space. These fees are required as part of the covenants
(CC&Rs) recorded against the property.
Staff is aware of at least two other instances in which housing
developers have imposed similar private transfer fees. To
settle a lawsuit over housing development in the Martis Valley
near Truckee, the developer and environmentalists agreed to
impose transfer fees for the purchase of open space, mitigation
of environmental impacts, and the development of affordable
housing. In Orange County, Lennar Homes has used private
transfer fees to direct funding to the Lennar Charitable Housing
Foundation, a non-profit organization that supports the
development and rehabilitation of homeless shelters.
This bill prohibits any condition requiring the payment of a fee
upon transfer of real property, unless that condition was in
effect on December 31, 2007, by declaring such conditions as a
restraint on alienation repugnant to the interest created. The
bill exempts the following from this prohibition:
Governmental fees or taxes
Mechanics' liens
Court ordered transfers, payments, or judgments
Property agreements in connection with a legal separation or
dissolution of marriage
Fees, charges, or payments in connection with the
administration of estates or trusts
Fees, charges, or payments imposed by lenders or purchasers of
loans
Any assessment, penalty, or fee authorized by the
Davis-Stirling Common Interest Development Act.
The bill also states various findings relating to the current
practice of imposing private transfer fees and the alleged
problems and impacts of those fees.
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COMMENTS:
1.Purpose of the bill . According to the sponsors, transfer fees
based on a percentage of the sales price of a home are
increasingly being imposed by developers on homebuyers.
Generally, these fees must be paid every time each home in a
development is sold. Fees totaling 1.75 percent of a home's
sales price have been seen. There is no upper limit on the
percentage of a home's sales price, however, at which a
transfer fee can be established. In addition, such transfer
fees can be imposed by a developer for an unlimited number of
years. While these fees are often imposed for 20 to 25 years,
many are imposed in perpetuity. Finally, there is no
guarantee that the funds generated by these transfer fees will
be used to pay for projects that directly benefit the
development or the immediately surrounding community. There
is no nexus requirement nor is there any oversight of the
entities receiving the transfer fee funds to ensure that they
will accomplish that with which they have been tasked. The
author and sponsors believe that there are a number of
existing, more accountable mechanisms for funding local
improvements including homeowner associations, Mello-Roos
districts, and bond programs.
2.Transfer fees can provide beneficial resources . To date,
California developers have used private transfer fees to
purchase open space as environmental mitigation for a project
or to support the development of affordable housing and
homeless shelters. In the case of environmental benefits, the
imposition of the fees in the two cases so far has ended
litigation that threatened to prevent housing from being built
at all. In any case, transfer fees can provide resources for
important societal objectives. The sponsors of the bill do
not necessarily object to these uses, but rather to the
mechanism for collecting the funds.
3.The differences between funding mechanisms . To the extent
that private transfer fees fund certain types of public
benefits, local governments could collect funds for this
purpose through other funding mechanisms such as assessment
districts or Mello-Roos districts. Assessment districts may
be used to fund public works and limited types of public
services that directly benefit the property owners.
Mello-Roos districts may be used to fund public works projects
and a broader list of public services. A direct benefit to
the property owners is not required for Mello-Roos districts.
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The establishment of such districts would be subject to a
public process and a vote of property owners within the
district. In most cases where developers have imposed these
fees, however, the developer is the only property owner so
that the outcome of a public vote is certain and future
homebuyers are very unlikely to participate in public
hearings.
In essence, then, there are three main differences between the
use of private transfer fees versus assessment or Mello-Roos
districts. First, private transfer fees are not limited to
statutorily enumerated uses. While open space acquisition and
maintenance probably does qualify as an allowable use of
Mello-Roos districts and maybe even assessment districts,
other uses such as homeless shelter development almost surely
do not. Second, private transfer fees are paid only upon
sale. Mello-Roos and assessment district fees are paid
annually. Third, assessment district and Mello-Roos fees are
channeled through a local government rather than directly to a
private third party. The sponsors point out that local
governments are more accountable to the public. A local
government, however, may not be the most appropriate entity to
administer the desired funding. Land trusts, for example, are
probably a better fit for purchasing and maintaining open
space. If a non-governmental entity is the ultimate user of
Mello-Roos or assessment district funds, then many of same
accountability issues apply as with private transfer fees
except that the local government would be in a stronger
oversight role.
To the extent that there is agreement funds are being used for
a legitimate and beneficial purpose, all of these funding
mechanisms are simply different means to the same end. It is
unclear why one mechanism is any more appropriate than others.
Property owners end up paying either way.
4.Another fee that the market will adjust to . Under current
law, cities and counties may already impose taxes on the
transfer of real property. In addition, many other fees and
charges are paid out of escrow when a property sells. Private
transfer fees are one more line item on the escrow
instructions. To the extent that the existence of such a fee
impacts the value of the property, as long as the fee is fully
disclosed the market will adjust to the fee. A homebuyer who
knows that she must pay such a fee upon subsequent resale will
pay the developer less for the home than for a comparable
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property. Likewise, future buyers will pay less to the
seller.
5.Potential abuses . The sponsors point out that private
transfer fees are not limited to non-profit public benefit
corporations but can also be imposed for the benefit of
individuals or corporations. They point to a website that
encourages homeowners to record transfer fee requirements
against their own properties in order to receive a share of
all future sales. While such fees should be reflected in the
market value of the property, there seems to be little policy
rationale to allow such fees. As an alternative to
prohibiting such transfer fees, the committee may wish to
restrict their use to non-profit entities for the provision of
a public benefit.
6.More oversight of transfer fees beneficiaries needed ? The
sponsors argue that, unlike local governments, non-profit
organizations or others that receive private transfer fees are
not accountable to the fee payers or to the public at large.
This could be remedied by imposing various transparency and
accountability requirements upon the entities that receive
transfer fees. If the committee wishes to allow private
transfer fees, it may wish to impose transparency and
accountability requirements upon beneficiaries.
7.Disclosure critical . In order for the real estate market to
adjust home sales prices to reflect the existence of transfer
fees, it is critical that buyers and sellers be aware of the
fee and its magnitude. Under current practice, the transfer
fees are included in the covenants (CC&Rs) of a homeowner
association. These documents can be long, and consumers and
title companies may not catch such requirement early in the
sales process. If the committee wishes to allow private
transfer fees, it may wish to consider requiring recordation
of such fee requirements on a separate form and disclosure of
the fees on the existing real estate disclosure form.
8.What's good for the goose? In some cases, private transfer
fees may not apply to the initial purchaser of a new home but
only to subsequent buyers. Where the developer has already
paid an equal or greater amount for the public benefit to
which the fees accrue, this may be appropriate. In cases
where the developer does not make such payments, however, this
arrangement seems unfair. Why should the developer get a
break on the fee when subsequent do not? If the committee
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wishes to allow private transfer fees, it may wish to require
that the fee apply to both the first and all subsequent sales
of the property unless the developer has paid an equal or
greater amount.
9.Subordination . The sponsors argue that there is no
requirement currently that transfer fees be subordinated to
other liens or fees. In the event that a transfer fee is not
subordinated and a home is sold for less than the total of
liens and fees, it is therefore possible that the private
transfer fee would be paid prior to some lienholders. If the
committee wishes to allow private transfer fees, it may wish
to consider requiring their subordination to liens on the
property.
10. Placement of the restrictions or limitations . The bill
currently places the prohibition on private transfer fees in
the section of law relating to restraints on alienation.
While this is a matter that falls more under the expertise of
the Judiciary Committee, it seems unlikely that a court would
find a transfer fee to be a restraint on alienation. A fee
does not prevent a home from being sold but rather lowers the
value of the home. The committee may wish to consider an
amendment to place the restrictions or limitation of this bill
into a stand-alone section.
11. Arguments in opposition . Opponents argue that funding
community facilities and amenities is often required as part
of the development process. In their view, "reconveyance
financing" is a smart and equitable way to fund these
facilities and amenities over time in order to avoid saddling
buyers of new homes with huge up-front costs. If original
homebuyer were required to pay the entire cost of required
mitigation at the time of initial sale, the cost would be 10
to 20 times higher. Opponents further point out that the fees
in existence to date have not deterred home sales at all.
That said, opponents are willing to prevent individuals from
imposing transfer fees for their own benefit and to improve
disclosure.
12. Double referral . The Senate Rules Committee has referred
this bill to both the Transportation and Housing Committee and
the Judiciary Committee. If this bill is approved by the
committee, it will be re-referred to the Judiciary Committee
for a second policy hearing.
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RELATED LEGISLATION
AB 1574 (Houston) requires a seller of a new home first sold
after January 1, 2008, which is subject to a covenant requiring
payment of a fee at the time of conveyance to make a specified
disclosure and to record this disclosure in the chain of title.
This bill is set for hearing in the Assembly Judiciary Committee
on April 24.
AB 980 (Calderon) states the intent of the Legislature to enact
legislation to ensure that home buyers are adequately informed
about transfer fees that are imposed by developers on home
buyers and that are based on a percentage of the sales price of
the home. This spot bill is in the Assembly Rules Committee
awaiting assignment to a policy committee.
POSITIONS: (Communicated to the Committee before noon on
Wednesday, April 11,
2007)
SUPPORT: California Association of Realtors (sponsor)
Atascadero Association of Realtors
Atascadero Chamber of Commerce
Barstow Association of Realtors
Bay East Association of Realtors
Berkeley Association of Realtors
Beverly Hills/Greater Los Angeles Association of
Realtors
Big Bear Association of Realtors
Cerritos Regional Chamber of Commerce
Chico Association of Realtors
Citrus Valley Association of Realtors
Coastal Mendocino Association of Realtors
Conejo Valley Association of Realtors
Contra Costa Association of Realtors
Corona Norco Association of Realtors
Delta Association of Realtors
Downey Association of Realtors
East San Diego County Association of Realtors
El Dorado County Association of Realtors
Fresno Association of Realtors
Greater Antelope Valley Association of Realtors
Hetch Hetchy Association of Realtors
Inland Valleys Association of Realtors
Kings County Board of Realtors
Laguna Niguel Chamber of Commerce
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Lassen Association of Realtors
Mariposa County Board of Realtors
Monterey County Association of Realtors
North San Diego County Association of Realtors
Northern Solano County Association of Realtors
Orange Belt Board of Realtors
Orange County Association of Realtors
Pacific West Association of Realtors
Paradise Association of Realtors
Pasadena-Foothills Association of Realtors
Paso Robles Association of Realtors
Placer County Association of Realtors
Rancho Southeast Association of Realtors
Sacramento Association of Realtors
San Mateo County Association of Realtors
Santa Clara County Association of Realtors
Shasta Association of Realtors
Silicon Valley Association of Realtors
Solano Association of Realtors
Southland Regional Association of Realtors
Tehama County Association of Realtors
Tuolumne County Association of Realtors
Ventura County Coastal Association of Realtors
West Contra Costa Association of Realtors
West San Gabriel Valley Association of Realtors
Yosemite Gateway Association of Realtors
OPPOSED: California Building Industry Association
California Council of Land Trusts
California League of Conservation Voters
California State Parks Foundation
Defenders of Wildlife
Gray Panthers
Housing California
Macarthur Transit Community Partners
Orange County Community Housing Corporation
Planning and Conservation League
Playa Capital Company
Playa Vista Community Services
Sierra Club
Truckee Donner Land Trust
Wathen Castanos Mazmanian