“Private” Transfer TaxesMay 16, 2006Taxation Committee Land Use and Environmental Committee Legislative CommitteeThe following is for study only and has NOT been approved by the Taxation Committee, Legislative or Executive Committees or the Board of Directors.Issue Should C.A.R. take action to prevent the use of “private” transfer taxes (PTTs) by developers and public interest organizations to pay for programs benefiting the public and, if so, what form should that action take?Action Optional.Options 1. Sponsor or support legislation prohibiting PTTs from being imposed on home buyers.2. Sponsor or support legislation requiring a disclosure to home buyers describing the PTT and the impacts the PTT may have when they sell their home.3. Sponsor or support legislation curtailing the ability of environmentalists to bring legal action under the state’s environmental protection acts.4. Recommend that a task force be appointed to address the PTT issue.5. Do nothing.6. Other.Status/Summary The use of “private” transfer “taxes” (PTTs) is apparently coming into vogue in Placer County. In that county, environmental groups are filing lawsuits against developers alleging violation of one of the state’s environmental protection acts. Ultimately, an out of court settlement is reached between the environmental group and the developer. In return for an agreement by the environmental group to not pursue the lawsuit, the developer agrees to the imposition of a PTT. This PTT can be as high as one percent of the purchase price of a home and is paid by every buyer, after the first buyer, of a home in the developmentfor periods of up to 25 years. The monies generated by imposition of the PTT will be used for everything from environmental mitigation to the development of affordable housing. Some believe that such PTTs usurp functions that properly belong to local government and, as a result, that the imposition of PTTs should be limited or even prohibited.Discussion
In late March, the Placer County Association of Realtors® (PCAR) approved a resolution requesting C.A.R. staff “toexplore legislative remedies, limitations or prohibitions on reconveyance fees agreed upon by parties to a lawsuit settlement which are paid by subsequent homeowners …” The association believes that these fees “undermine the publicplanning process and accountability of elected officials, by allowing special interest groups an ability to further their interest behind closed doors without the consent of public officials …”The resolution approved by PCAR was precipitatedby an out of court settlement reached by a developer, an environmental group and the City of Roseville which is located in Placer County. Originally, a lawsuit was brought by the environmental group against the developer and the city alleging that the project planned by the developer was going to detrimentally impact fairy shrimp habitat. Ultimately, the developer, the environmental group and the city reached an out of court settlement. The settlement required that every home buyer, after the first buyer, purchasing a home in the development to pay an additional one-half of 1 percent of the purchase price of the home into a fund. This requirement will be included in the covenants governing each home in the project and, for a periodof 20 years, require everyone purchasing a home in the development to pay the PTT. The monies in the fund will be used to purchase open space to mitigate the loss of fairy shrimp habitat.Subsequently, a second similar arrangement came to light. The development involved is also in Placer County in the Martis Valley near Lake Tahoe. Here, subsequent buyers will pay a full one percent fee for twenty-five years. One-half of the fee will be devoted to purchasing open space, and a quarter each to environmental mitigation and the development of affordable housing. It is estimated that $72 million will be generated by the fee.The imposition of this fee by developers is a problematic for Realtors® because it places two long standing C.A.R. polices in opposition to each other. It pits Realtors’® historic support of private property owner rights against Realtor’s® long held policy of keeping the price of homes as low as possible. On the one hand,C.A.R.’s policy has been that a private property owner is entitled to do with their property as they see fit. On the other hand, C.A.R. has always opposed additional front end fees and taxes that increase home prices. In fact, if it werea local government that was proposing the adoption of such a fee, the proposal would be adamantly opposed by C.A.R. as an unacceptable transfer tax. (That is why this issue briefing paper is referring to the fee as a “private” transfertax – the fee is being imposed by private entities as opposed to a public body and, if it were imposed by government, the fee would, in fact, be a tax since “fees” are limited to costs that are directly related to the benefit conferred to the payer of the fee.)Clearly, this device may gain in popularity with developers and environmentalist organizations. Both developers and environmentalists are likely attracted to agreeing to imposition of a PTT because it avoids potentially protracted and costly legal battles. And, for developers, such a settlement allows the developer to proceed with the project. Also, the cost of any environmental mitigation that may cut into the developer’s profit margin is put off onto subsequentbuyers – buyers the developer will not be dealing with since the developer deals with the only the first buyer of a home in the project and that buyer doesn’t pay the PTT. Environmentalists, on the other hand, are able to generate fundsfor programs they believe are in the public’s interest.In a meeting with representatives of home builders, C.A.R. governmental affairs staff expressed their concerns about PTTs. According to these representatives, eliminating the PTT serves toonly treat the symptom of the real problem and not the problem itself, namely, the ability of environmental groups to bring a legal action against developers under California’s environmental protection acts. From their perspective, developerswould not be agreeing to imposition of a PTT but for the ability of environmentalists to delay and increase the costs associated with home building projects through legal action. Consequently, according to these builder representatives, the best solution to PTTs is to curtail the ability of environmentalists to bring legal action against developers.While it is likely that if developers were more immune from environmentalist lawsuits they would be less inclined to agree to the imposition of a PTT, the chances that the current legislature will approve a measure that somehow shields developers is remote – at best. While the state legislature has probably moved more to the political center in recent years, it is unlikely that it wouldapprove legislation that would diminish the ability of environmental organizations to advocate on the public’s behalf. Not only would such legislation run counter to the tradition of allowing redress in the courts regarding issues in the public interest, but the legislature is more comfortable allowing the courts to decide these matters on a case by case basis. It is difficult, if not impossible, to craft a statute that can address the unique aspects of a specific environmental controversy.Arguably, a legal challenge could be brought against the City of Roseville type of arrangement. A legal memorandum was commissioned by C.A.R. regarding that arrangement. The memorandum noted that under Proposition 13, a local government may impose a special tax (i.e., for a specified purpose) only upon approval by two-thirds of the voters. In the City of Roseville arrangement, the city isn’t imposing the “tax” on the subsequent home buyers. However, the city was a party to the original lawsuit and the settlement and, thus, approved the imposition of the fees. In addition, under the terms of the settlement, the city has a say regarding the open space properties that are purchased to mitigate the loss of fairy shrimp habitat. Therefore, the argument could be made, that the city is very creatively imposing a tax without the required approval of the local voters. According to the memorandum, the greater the involvement of the local government, the greater the likelihood a court will find such a tax violative of the state constitution. (Note: Proposition 13, in fact, prohibits special transfer taxes and, so, this is the type of tax that not even a city could impose.) However, more recent agreements, like that in Martis Valley do not directly involve the local government. Instead, the agreement is solely between the developer and the environmental organizations and the funds generated flow to the environmental organization which determines how to best to spend the funds. As a result, as a long term strategy, a challenge to the City of Roseville arrangement as violating Proposition 13 would not yield much because developers and environmentalists would quickly come to the conclusion(if they haven’t already done so!) that it is best to not involve the local government.One approach that may be more a more effective way of combating PTTs would be to statutorily require a disclosure detailing the provisions of the covenant requiring payment of a PTT and advising the potential home buyer of the possible impacts of the PTT. This is important because, as things now stand, there is little likelihood that the PTT will generate much discussion between the developer and the first buyer of a home in the development because that buyer doesn’t have to pay the PTT. As a result, the first buyer may not consider how a subsequent buyer may react to having to pay a PTT and, more importantly, what the subsequent buyer may demandin return for having to do so. While the subsequent buyer is responsible for paying the PTT, that buyer may seek a lower sales price to mitigate having to pay the PTT. Of course, a lower sales price means a lower net profit to the home seller. A disclosure could point this out to the potential home buyer and raise the profile of the PTT to the point where developers are hesitant to agree to imposition of a PTT given that they will now have to discuss the ramifications of the PTT with the first home buyer – something that developers will now not likely have to do. Such a disclosure would be analogous to the disclosure now required to be provided to prospective purchasers of homes in Mello-Roos communities which seeks to alertbuyers of the additional costs associated with buying a home in such a community. Another approach would be to outright ban the use of PTTs by developers and environmental organizations. The public policy argument supporting adoption of such legislation is that developers and environmental organizations are usurping a role that is more properly held by local government. As matters stand, there is no public accountability with regard to the decisions on how the monies generated by the PTTare spent on the public’s behalf – decisions that if the PTT was imposed by a local government would be accompanied by publicly noticed hearings.Absent any response, it is likely that PTTs will gain in popularity because they allow developersand environmentalists to achieve their ends on the backs of home buyers that neither will have to deal with directly – those home buyers will enter the picture far after the settlement agreement has been reached by developers and environmentalistsimposing the PTT.