Environmentalists and builders are uncommon bedfellows, particularly in the political arena. But a fledgling financing mechanism, which can be used by builders to raise money for a variety of purposes when a property changes hands, has made fast friends of frequent foes while breaking some traditional alliances.
Proposed legislation in California related to these new fees — which are collected when a home is sold and are typically based on a percentage of the selling price — has pitted Realtors against builders and environmentalists. While government entities have passed state or local measures requiring buyers, sellers or both to pay transfer fees related to real estate sales, this relatively new form of fees does not require government approval.
The California Association of Realtors, which has about 200,000 members, has supported legislation to restrict the use of transfer fees, though a Senate committee has rejected one of two bills proposed by the association. And the California Building Industry Association, a statewide trade group representing about 6,700 companies in the home-building industry, is the sponsor of another related bill that the Realtor group initially opposed.
The Realtor association’s Senate Bill 670, which last week was rejected by a Senate committee, sought major restrictions on the use of these so-called private real estate transfer fees.
“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 large expanse of vacant land while preserving nearly 6,000 acres of open space,” according to a Senate analysis on the legislation.
The $85 million needed to purchase the open space will be generated through a transfer tax that is based on a percentage of the sales price “each time a home within the development is sold over the next 20 years,” and the fee will go to a private, nonprofit land trust.
In another case, a developer and environmentalists settled a lawsuit over a housing development in the Truckee area by setting transfer fees to buy open space, mitigate environmental impacts and develop affordable housing. And Lennar Homes has directed revenue from transfer fees in Orange County to a nonprofit organization that supports homeless shelters, according to the analysis.
Realtor group officials say they worry that builders will increasingly use transfer fees with new developments, and that these fees will harm future home sales.
Colleen Badagliacco, CAR president, said that Realtors believe there should be a required end date for all of the fees. Builders, she said, have “created an unholy alliance with some of the environmental groups, using (transfer fees) as a way to evade certain environmental mitigation” by passing those costs on to consumers.
She said there are plenty of existing tax mechanisms available to pay for public projects, and the private transfer fees lack oversight. “The spin the builders have put on this is that it will fund the kind of things everybody wants to see in a community,” she said, though the danger is that the scope of these fees can be very broad and that home buyers may not fully understand the transfer fees.
“We need up-front disclosure of existing (fees). We need reasonable constraints on future ones. We need to impose some good government structure on this,” she said.
Meanwhile, Kimberley Dellinger, a legislative advocate for the state’s building association, which opposed the Realtors’ SB 670, said, “Home builders have used this — and not extensively — in a few cases to date” to pay for community amenities that are either required at the government level or by community groups.
Home builders, facing heightened requirements, “look at the best way to absorb and spread those costs and still sell their products,” she said. “When you get to a certain level you can’t put all those costs on home buyers and still sell product at an affordable price.”
The transfer fees, which the builders’ group refers to as reconveyance financing, is an alternative to other financing mechanisms that can affect home affordability, Dellinger said.
She said that in some cases it’s appropriate for the transfer fees to extend indefinitely when the costs of the beneficiary projects are ongoing, such as the continuous maintenance of protected land.
“It is very clear that the Legislature is not inclined to eliminate this as a legitimate tool for financing a legitimate benefit,” she said. Some questions that the Realtors have raised are speculative in nature, she said, though it has generated a good conversation about the potential for abusing the fees.
“There aren’t a lot of controls. There aren’t a lot of rules around this. There are potentials for abuse,” she said. The building group’s bill, Assembly Bill 1574, seeks to limit the use of the fees for public benefits within the area where the fees are imposed.
AB 1574, which received a unanimous passing vote in a committee last week, prohibits transfer fees in cases when the seller — “or an entity controlled by the seller” — has a direct financial benefit from the fee. Also, the bill provides that sellers of properties subject to the transfer fees must provide a disclosure statement “containing specified information and shall record this statement against title to the property.”
Dellinger said, “The key is making sure long before they are sitting down and signing those papers that everybody knows what the fee is, where it goes and why it’s there.”
A state Assembly analysis of AB 1574 notes that “a coalition of environmental groups, including the Sierra Club, Natural Resources Defense Council and Planning and Conservation League, among others, are strongly supportive of the use of real estate transfer fees. They state that real estate transfer fees are an important tool that can help provide balance between development and the essential need to protect our natural resources.”
It’s a fact, Dellinger said, that “you probably don’t find many bills that we’re lined up together on” with environmental groups, though she noted that some existing transfer fees are the result of litigation.
The Realtor group’s Assembly Bill 980, which also passed a committee last week with a unanimous vote, provides that specific documents must be recorded for existing and new transfer fees. The Realtor group typically opposes all forms of real estate transfer fees — Realtor commissions, like transfer fees, are typically based on a percentage of a home’s selling price.
Private transfer fees have been discussed in several states, said NAR spokesman Lucien Salvant, including Florida and South Carolina.
At least one company in Florida promotes the use of private transfer fees by individual sellers as a way to earn money on future sales of that property.