4- Disclosure of "Private" Transfer Taxes
Disclosure of “Private” Transfer TaxesDecember 20, 2006Legislative Committee
Taxation Committee
Land Use and Environmental CommitteeThe following is for study only and has NOT been approved by the Legislative, Taxation, Land Use and Environmental, Executive Committees or the Board of Directors.
Issue:
Should C.A.R. take action to insure the Private Transfer Taxes (PTTs) that have already been imposed are appropriately disclosed to consumers?Action:
Optional.Options:
1. Sponsor legislation to require a separate disclosure to potential home buyers as to whether the home they are considering purchasing requires the payment of a PTT, the percentage of the home price constituting the PTT (possibly with dollar amount examples), and/or the duration of the PTT and, potentially, a warning that the subsequent buyer may seek a lower home price to offset the cost of the PTT.2. Do nothing.3. Other.Status/Summary
“Private” transfer “taxes” are increasingly being used to settle disputes between environmentalists and builders or, in the alternative, by builders to proactively avoid a lawsuit by environmentalists or to smooth development negotiations with the local government. Typically, in return for an agreement by the environmental group to not pursue a lawsuit based on one of the state’s environmental protection acts, the builder agrees to the imposition of one or more PTTs through a covenant included in the covenants, conditions and restrictions (CC&Rs). These PTTs have totaled as much as 1.75 percent of the purchase price of a homeand is paid by every buyer of a home in the development for 20 to 25 years or, even, in perpetuity. At the October business meetings, the Board of Directors adopted the final report of thePTTs Task Force which included a recommendation that the Legislative Committee determine in January 2007 whether legislation is needed in connection with the disclosure of PTTs already imposed. C.A.R. is sponsoring legislation to prohibit the imposition of a PTT; however, PTTs established prior to the effective date of that legislation will remain in place and the task force believed that consideration should be given to statutorily requiring disclosure of those PTTs.DiscussionIn late March, the Placer County Association of Realtors (PCAR) approved a resolution requesting C.A.R. staff “to explore legislative remedies, limitations or prohibitions on reconveynce 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 precipitated by 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 fairyshrimp 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 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 period of 20 years, require everyone purchasing a home in the development to pay the PTT. Themonies in the fund will be used to purchase open space to mitigate the loss of fairy shrimp habitat.Subsequently, several other similar arrangements came to light. In one development, the builder had imposed three PTTs with a total cost to the home buyer of 1.75 percent of the purchase price of the home. And, while many PTTs are in effect for only 20 or 25 years, other PTTs are in place in perpetuity. Finally, the uses to which PTT funds areput have evolved to include a variety of subjects beyond environmental mitigation, for example, the development of affordable housing and providing assistance to the homeless.Due to the issues raised by the imposition of PTTs by builders, a C.A.R. task force was appointed in July with the following mission statement:Become familiar with how various forms of private transfer taxes (PTTs) operate. Generally, PTTs are fees imposed on sellers and/or buyers by way of a deed restriction requiring the payment of a fee based on some percentage of the purchase price each time the home transfers.
Determine what, if any, problems PTTs present for REALTORS® in their role as agents for sellers and buyers.
Make recommendations as to what, if any, actions (legislative or otherwise) C.A.R. should take with regard to PTTs and report to the C.A.R. Board of Directors at their October Board meeting.
After studying the issue for several months, the task force made the following recommendations in itsfinal report which was adopted by the Board of Directors in October:C.A.R. should sponsor legislation to prohibit the imposition of any PTTs.
C.A.R.’s Legislative Committee should determine in January 2007 whether legislation is needed in connection with the disclosure of existing PTTs to avoid real estate licensee liability associated with that disclosure.
C.A.R.’s Standard Forms Committee should determine whether a separate form is needed that would be provided by sellers to buyers at the time a home is listed (or, if not listed, at the same time at which the Transfer Disclosure Statement is required to be provided) disclosing to the buyer the existence, cost and duration of any PTTs. In addition, the Standard Forms Committee should determine if information relating to PTTs should be included in the statewide advisory and/or in the buyer advisory.
This issue briefing paper will concern itself with the second recommendation. While C.A.R. is sponsoring legislation to prohibit the imposition of PTTs, all of the PTTs established prior to the adoption of that legislation will remain in effect. As a result, the task force believed that consideration should be given to statutorily required disclosures to inform potential home buyers when there is a requirement to pay a PTT that is already in place.Among the problems which the task force concludedPTTs present – and which point to items which should be considered for disclosure – are the following:A PTT can be imposed by a developer for an excessive number of years. Generally, the minimum length of time that PTTs are currently being imposed ranges from 20 to 25 years; however, many are imposed in perpetuity.
The cost of a PTT can be prohibitively expensive for home owners and buyers. PTTs of up to 1.75 percent of a home’s sales price have been seen; however, there is no upper limit on the percentage of a home’s sales price at which a PTT can be set.
The requirements for disclosing the existence of a PTT are limited at best. In addition, the PTT requirement can be masked by the developer by not having it apply to the first buyer but having it, instead, apply to only subsequent buyers.
Many of the PTT Task Force members were troubled by lack of a clear disclosure. For example, the CC&Rs for the Gray’s Crossing development run to almost 120 pages with the existence of the three PTTs that home buyers in that development are required to pay disclosed on page 112. However, the particulars of each PTT – amount, duration, etc. – can only be ascertained by obtaining each of the separate benefit fee agreements.If a PTT exists, that fact will be disclosed in the Department of Real Estate’s subdivision report. However, it is not clear that a potential home buyer would recognize the dollar cost of a PTT. For example, the subdivision report for the Martis Camp development near Lake Tahoe, mentions a “1 percent fee” but doesn’t indicate that the fee is 1 percent of the sales price of the home. Also,the subdivision report makes no mention of the continuing nature of the fee (i.e., that when the buyer becomes the seller, the new buyer will also have to pay the fee).A more clear disclosure could provide home buyers with information relating to the percentage of the home purchase price constituting the PTT, as well as the duration of each of the PTTs the home buyer will be required topay should they choose to purchase a home in a development. Since the price of a home is negotiable, consideration should also be given to including a dollar example or examples so that theprospective home buyer has a better idea of the actual dollar amount he or she could end up paying. Finally, the disclosure could inform the home buyer of how the PTT may affect the net income that they may realize when they later sell their home – namely, that the next buyer may attempt to negotiate a reduction in the price of the home to offset having to pay the PTT. 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 alert buyers of the additional costs associated with buying a home in such a community.An additional issue that warrants consideration is the point at which the disclosures should occur. For example, should they occur in all advertising related to the development? Or, should the disclosures be made at the same time the law requires that the Transfer Disclosure Statement (TDS) disclosures be made? Current law requires that the TDS be provided “as soon as practicable before transfer of title.” However, if the TDS is provided after the execution of the offer to purchase, the buyer has 3 days after personal delivery of the disclosure form, and 5 days after delivery by mail, to terminate the purchase agreement.One method of making these disclosures that should be considered is that contained in Assembly Bill 2922 (Jones, 2006). That measure – which, was vetoed by the Governor for reasons unrelated to the manner in which the required disclosures were going to be made – would have required redevelopment agencies, in caseswhere such agencies are already required to record affordability covenants or restrictions on a property, to also record a separate document that specifies any affordability restrictions and the date on which these affordability restrictions will expire. The intent of the measure was to ensure that potential purchasers of a property are made aware of any affordability covenants. These covenants may be buried in a lengthy document and, thus, may be difficult for title companies and prospective buyers to locate.
