Saturday, April 26, 2008

Buyer Beware: "Freehold Licensing"

Both the Florida House of Representatives and the Florida Senate have unanimously voted in favor of Senate Bill 464, which would, with certain limited exceptions, void "transfer fee" covenants purporting to encumber Florida real estate. Lawyers in Florida are writing Governor Crist, asking him not to veto the legislation.

According to an email I recieved from the Executive Council of the Florida Bar's Real Property, Probate and Trust Law Section, the transfer fee scheme originated in Texas. Pursuant to this scheme, a property owner reserves the right to receive a percentage of the sales price for future sales of their property for many years after they sell property, including sales to remote purchasers many years in the future. The scheme is promoted on the internet by a company named "Freehold Licensing," which is seeking to patent the arrangement and charge prospective property sellers a licensing fee for use of its form documents.

The Executive Council unanimously voted in favor of the proposed legislation, and the Section leadership firmly believes that this scheme has no place in Florida for a number of reasons, including the following:

(1) Long-standing public policy favors the marketability of property, free of title defects and unreasonable restraints on alienation.

(2) The proponent of the "transfer fee" covenants scheme, Freehold Licensing, has a strong profit motivation for seeking the veto of the bill since it hopes to secure significant licensing fees from the scheme.

(3) The imposition of covenants which would require the payment of fees each time property is sold will adversely impact the marketability of property.

(4) Property subject to transfer fee covenants will be worth less, but prospective purchasers may be unaware of the negative impact of such covenants on the value of the property until they attempt to sell the property.

(5) The imposition of transfer fees upon the sale of property will further erode property values in an existing depressed real estate market.

(6) Other, more appropriate, approaches are available to fund infrastructure improvements, including homeowners' associations and community development districts, which are accountable for the manner in which the funds are spent.

(7) The purported imposition of "transfer fee" covenants is likely voidable as an unreasonable restraint on the alienation of property or because they fail to "touch and concern" the affected property, but, since the amount of the fee in any individual case, may not be sufficient to justify litigation to overturn the covenant, it is appropriate to address this issue via a legislative enactment.

(8) This scheme has been criticized by legal commentators.

You might want to keep an eye out for this scheme appearing in your locale, especially if you are getting ready to buy real estate. I do not know whether it is presently legal in Texas.


Anonymous said...

No one likes the thought of additional fees. However, transfer fees actually represent a much fairer (and economical) way to apportion development costs.

If you are buying a new home, would you prefer (a) that the developer include the entire cost of the amenity center, utilities, etc., in the home price, and then ask you to borrow the money to pay for it (and to pay interest on this additional amount) and to then pass the costs along to the next buyer, or (b) would you prefer that the developer lower the sales price and apportion the costs over time by imposing a 1% transfer fee (which the developer can then sell off for cash today) and which allows you to buy for less, and sell for less? These are the only two choices: cash from you, or cash from investors who will be paid over time from the transfer fee.

The latter allows you to take out a smaller loan, pay less interest, pay lower closing closing costs, etc. You then pay 1% when you sell, but you are still better off when compared to option "a".

Before you argue that there is no assurance that a developer will lower the costs, ask yourself, "would you pay the same for a home with a transfer fee as you would pay for the home without the fee?" Of course not.

Transfer fees represent a much fairer way to apportion costs. It is why school districts float bonds (to spread the costs over those who will use the schools). When the issue came up for debate in California, the proposed ban failed to win one single vote. Supporters of the ban went to Florida and quietly slipped the bill through without debate. Which process do you prefer?

As a point of clarification, Freehold does not charge a fee and it does not license individual homeowners. Instead, it works solely with very large residential and commercial property owners, helping them to lower their costs today, and is compensated solely through a small participation interest in the rights it helps to create.

Anonymous said...

I am a land owner that has been approached by Freehold sales people on more than one occasion. I will be kind and say that I think “very little” of the program. They dangle the promise of cash payments to the developer soon after he signs. They have been operating for several years I am aware of and have yet to produce a single dollar to “buy out” a developer. They are clearly using that promise of cash as bait to get cash strapped and or greedy developers to sign. They claim that the developer will be getting 6% to 8% of the “finished value” of his development in cash today if he encumbers his land with these transfer fees. This is pure fantasy. In my case, I have a development that when fully built out will have a value of around $90,000,000. If they were to pay me 6% of that amount, I would receive $5.4 million in cash. That sounds like a great deal to me for the following reasons. 1) My land is only worth $2,000,000. So they would be giving me nearly 3 times its value in cash yet I still own it. 2) I may never develop the land because I can’t get financing, can’t get zoning, or simply change my mind. In that event, the investor putting up the $5.4 million gets nothing, ever. What investor in his right mind would invest money into transfer fees on properties that have not even been built yet? The obvious answer is that there are no investors foolish enough to do that. And to add another bit of risk for the investor, Freeholds method is being aggressively challenged in Texas, Florida and California (so far). If these kind of transfer fees get banned the investor is wiped out. (At best he would have a lawsuit if he wants to fight the State government.) One of the reasons Freehold puts such a ridiculous value on these transfer fees is that they assume that the properties are going to appreciate at a rate of 8% for the next 99 years! It sounds like they had their model developed by the same guys that thought securities backed by sub-prime loans could never lose money. The latest carrot they are using is equally laughable. Last week I had one of their representatives claim that the federal government was going to put a trillion dollars of stimulus money into buying these transfer fees! They told me with a straight face that they were actively working to get large amounts of stimulus money redirected into the purchase of transfer fees, and that I had better get in fast if I wanted to get my cash. I don’t think I really need to go into why the federal government is not about to hand out billions of dollars to real estate developers. Clearly they are using these stories of imminent funding to induce developers and land owners to sign up when they otherwise would not. This is a questionable tactic at best. Perhaps I will be proven wrong, and there really are large pools of money seeking low returns combined with high risk. And maybe President Obama will get on T.V. and tell Congress that they must fund transfer fee purchases right away for the good of the country. My opinion is that neither of these two things are going to happen. You can decide for yourself.

Anonymous said...

why so angry about the "potential" of an alternative source of funding for commercial and residential developments? Looks as if they don't want any money from you unless they are succesful.

Anonymous said...

A California staff analysis concluded what real estate attorneys already know, and that is that in order to constitute an unreasonable restraint on alienation, the restraint must be unreasonable. In contrast, the Florida bill states that any fee, REGARDLESS OF THE AMOUNT, is "unreasonable". This is obviously an untenable assertion, and has lead more than one law firm to say that the statute is unconstitutional on its face. One cent is "unreasonable"? The legislature went on to say that the fee suddenly becomes reasonable, REGARDLESS OF HOW HIGH THE FEE MIGHT BE, if the fee goes to the realtors or other select groups like non-profits. Wait a minute? So, a select group can own the fee (which is a real property right), but they can only sell the rights to someone else within that select group? I think that is called .... (drum roll please) ... an unreasonable restraint on alienation.

I was here in California during the battle over reconveyance fees. It was a very public discussion (unlike Florida), and the proposed bann was soundly defeated. Some of the comments made (which can be found online) are:

“Home builders ... look at the best way to absorb and spread ... costs and still sell their products. You can¹t put all those costs on home buyers and still sell at an affordable price. ... Transfer fees represent an alternative to other financing mechanisms that can affect home affordability. If builders weren¹t allowed to pass along costs in a transfer fee, they¹d have to make up for it by adding thousands of dollars to their
homes initial selling price, shutting out buyers." Kimberly Dellinger, California Building Industry Association. Source: Builders, Realtors square off ... May 16, 2007. Inman News.

“A bill to ban transfer fees, backed by the California Association of Realtors, was defeated in a Senate committee earlier this month. Private transfer fees, a relatively recent financing tool, are a way to bankroll multimillion dollar development concessions (amenities)without necessarily affecting a home¹s initial purchase price”.- Jim Sanders, Sacramento Bee (May 21, 2007)

Reconveyance financing...helps keep home prices low by spreading costs over all beneficiaries of a project. - Julie Snyder. Policy Director for non-profit Housing California.

I am not aware of any criticism by legal commentators. In fact, some of the largest law firms in the United States have counseled their clients that the program is a viable way to fund long term infrastructure and other improvements, and the program is implemented through a large network of attorneys.

A reconveyance fee will never be paid by an unwilling party. Instead, buyers are presented with the option of buying a home with a Reconveyance fee, and paying less today, or avoiding the fee (by buying another home) but being saddled with 100% of the entire costs of improvements and infrastructure, which the buyer must finance and then pass on to the next party. Most states prefer that buyers have the right to make their own decisions. Florida just happens to not be one of those states.

Anonymous said...

This whole Freehold deal is over reaching. You will see state after state ban these guys out of business. They give nothing to the property owner, but expect to get paid 1% every time the property sells for a century. And the payments are not tied to any identified improvements. That is nothing but pure greeed. They took a "clever" idea and warped it into something questionable at best.

Anonymous said...

You do realize that noone "has" to buy the property, correct? I am also fairly certain that you do not understand basic economics and that there would be full disclosure to the buyer so that they could make their own decision (buy property, negotiate price, walk away, etc.). There are also many benefits to the consumer/economy, especially on a macro level. There is change happening all over and the real estate industry is in dire need of some innovation.