Private Transfer Taxes: Next Steps
Private Transfer Taxes: Next StepsSeptember 18, 2007Taxation Committee
Land Use & Environmental Committee
Legislative CommitteeThe following is for study only and has NOT been approved by the Taxation Committee, Land Use & Environmental Committee, Legislative or Executive Committees or the Board of Directors.Issue:
Should C.A.R. consider changing its position of opposition to “private” transfer taxes (PTTs) and modify that position to accommodate some form of PTTs if they are appropriately restricted?Action:
Optional.Options:
1. Maintain position of opposing PTTs and re-introduce legislation in 2008 to prohibit their imposition.2. Maintain position of opposing PTTs; however, sponsor legislation expanding the use of the Mello-Roos Law to allow funding for environmental mitigation and/or affordable housing while otherwise prohibiting PTTs.3. Change position to NOT opposing developer imposed PTTs that are appropriately restricted and sponsor (or alternately, support) legislation with such restrictions which could include limiting PTTs to funding environmental mitigation and/or affordable housing, and/or other restrictions (what would those restrictions be?).4. Maintain status quo and oppose PTTs and legislation seeking to legitimize theimposition of PTTs by developers.5. Sponsor legislation to prohibit individual homeowners from establishing a PTT on their own home.  This option can be a stand alone effort or done in combination with any of the above options.6. Other.Status/Summary
“Private” transfer taxes are being imposed by developers on homebuyers to fund everything from environmental mitigation to the development of affordable housing.  Moreover, the political will does not exist within the legislature to prohibit the imposition of PTTs.  Nor is there the will to place reasonable restrictions on their imposition.  Consequently, absent some other solution, PTTs will continue to be imposed by developers.  One possible solution would be to expand the purposes for which Mello-Roos districts may be formed to include the funding of environmental mitigation and/or affordable housing – the primary purposes for which PTTs are now imposed – such an expansion of Mello-Roos would be a limitation on the unfettered use of PTTs that occurs today.  While there is no political will to prohibit or restrict the imposition of PTTs by developers there appears to be almost universal agreement that the establishment of a PTT by an individual homeowner should be prohibited.Discussion
“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) for the homes in the development they are constructing.PTTs have totaled as much as 1.75 percent of the purchase price of a home and are paid by every buyer of a home in the development for 20 to 25 years or, even, in perpetuity.  The monies generated by a PTT can be used for everything from environmental mitigation to the development of affordable housing.  Some believe that PTTs usurp functions that properly belong exclusively to local government and, as a result, that the imposition of PTTs should be limited, prohibited or, at a minimum, that the existence of a PTT should be explicitly disclosed to potential home buyers.As a result of this type of concern, the Taxation Committee, as well as Land Use and Environmental Committee, in June 2006 requested that a task force be appointed to address the private transfer tax issue.  A task force was appointed in July 2006 with the charge that it make recommendations as to what actions, if any, C.A.R. should take with regard to PTTs and report to the C.A.R. Board of Directors at the October 2006 business meetings.Among the recommendations of the task forcewere the following: (1) C.A.R. should sponsor legislation to prohibit the imposition of any PTTs, and (2) C.A.R.’s Legislative Committee should determine in January 2007 whether legislation is needed in connection with the disclosure ofexisting PTTs to avoid real estate licensee liability associated with that disclosure.  At the October 2006 business meetings, the Board of Directors adopted the final report of the PTTs Task Force.  The task force acknowledged that a fallback position may be necessary but that pursuing the prohibition should be the initial thrust of C.A.R.’s efforts.C.A.R.’s prohibition bill, SB 670 (Correa) was referred to the Senate Transportation and Housing Committee for its first hearing.  The chair of the committee (Senator Alan Lowenthal, D-Long Beach) stated that while C.A.R. had raised a number of legitimate issues with regard to the imposition of PTTs, he believed thatthese issues could each be addressed so that the PTT mechanism could continue to be employed and that an outright prohibition of their imposition was not required.  C.A.R. staff examination of the composition of the committee revealed that it was likely that the Democrats on the committee would follow the chair’s lead on this issue.  Thus, it appeared extremely unlikely that a prohibition on the imposition of PTTs would be approved by the committee.  As a result, C.A.R. was faced with either continuing to sponsor a prohibition only to see such an attempt fail or, instead, compromising so that, at a minimum, many of the abuses associated with PTTs could be addressed.Ultimately, C.A.R.leadership in an effort to eliminate unregulated PTTs  proposed the following:
  1. Limit transfer fees to 1.0% of the home sale price.
  2. Require transfer fee payment obligations to only be imposed for a particular number of years (but in no case more than 30 years) or until a particular dollar amount is raised, whichever comes first.
  3. Limitthe recipients of transfer fee funds to non-profit entities, and use of the transfer fee funds to facilities or services that provide a “public benefit” in the same county as, or within 25 miles of, the development.  An exception would be included for affordable housing so that it is deemed as providing a “public benefit.”
  4. Require transfer fee payment requirement to be part of the subdivision application andrequire that the transfer fee beneficiary annually file an audited financial statement with the Department of Real Estate which would also include a report on the progress that had been made with regard to the project.
  5. Require disclosure of the existence of a transfer fee payment obligation via a separately recorded document that contains the following information:

                 a.Notice that payment of a transfer fee is required.
b. The percentage of the home price constituting the cost of the fee and actualdollar cost examples for a home priced at $250,000, $500,000 or $750,000.c. The date the covenant, restriction or condition expires.d. The name of the recipient of the transfer fee funds.e. The purpose(s) for whichthe transfer fee funds will be expended.f.  Notice that the transfer fee payment obligation may potentially affect the future resale value of the property.
  1. Prohibit the imposition of a transfer fee payment obligation on a home on which re-sale price controls already exist.
  2. Require the transfer fee payment obligation to contain a clause that subordinates the transfer fee payment obligation to a purchase money mortgage.
  3. Require the transfer fee payment obligation, if it is imposed, to be imposed on all buyers, including the first buyer, of the real property after the obligation has been imposed.
  4. Define transfers triggering payment of a transfer fee as only those transfers which would trigger assessment of the documentary transfer tax.
  5. Limit the non-profit organizations receiving the transfer fee funds to spending no more than what is the reasonably necessary for administrative overhead (but in no case more than 5%).
  6. Prohibit the use of the transfer fee funds for lobbying or litigation, or the transfer of fee funds to another entity for use for such purposes.

The Senate Housing Committee chair was highly supportive of items (4) through (11); however, items (1) through (3) remained in controversy.  The chair favored a 2 percent cap on PTTs as opposed to a 1% cap, a 99-year limit on the duration of a PTT as opposed to a cap of 30 years and, finally, that the “public benefit” not be required to directly benefit the property on which a PTT has been levied.  The chair made the foregoing offer to C.A.R. and it was rejected.In May, when SB 670 was heard in committee, C.A.R. staff’s earlier prediction as to the committee’s position on an outright prohibition was proven correct when every Democrat on the committee refused to vote in favor of SB 670 because it would have too greatly constrained the imposition of PTTs by developers for the benefit of environmental organizations, affordable housing advocates, etc.The California Building Industry Association sponsored their own bill on this issue, AB 1574 (Houston).  Whenintroduced, the measure only provided a disclosure to potential homebuyers as to the existence of the PTT.  However, when AB 1574 reached the Senate Transportation and Housing Committee, it was confronted with all of the concerns that C.A.R. had raised in support of its SB 670.  The result was that AB 1574 was radically amended to look very similar to the amended version of SB 670.  However, AB 1574 conformed to the Senate Housing Committee chair’s views and set the cap on PTTs at 2 percent, allowed imposition for 99 years and the “public benefit” did not have to directly benefit the property on which the PTT was imposed.  As a result, unlike SB 670, AB 1574 passed the Senate Housing Committee in July.  (Making it clear, once again, that the committee in no way supported a prohibition on the imposition of PTTs.)However, a week later when AB 1574 reached the Senate Judiciary Committee, the chair of the committee following aggressive lobbying efforts locally and in the capital indicated to the author that she did not support the measure.  As a result, the measure was withdrawn from the committee’s agenda at the author’s request, apparently lacking sufficient support among committee members. A hearing to be held after the Legislature adjourns for the year may be held to further investigate the practice of using private transfer taxes.By virtue of C.A.R. successfully stopping AB 1574 in committee, the door was opened to C.A.R. pursuing legal action to stop the imposition of PTTs.  Generally speaking, the legislature is loath to pass legislation on a matter pending before the courts.  With AB 1574 not moving to the Governor to be signed into law and, thus, not legitimizing the practice of imposing PTTs, litigation can now be pursued.(Note: The Governor of Texas signed House Bill 2207 intolaw on June 15.  Interestingly, the measure allows a PTT if it imposed via a lien on the property and requires a disclosure to that effect; however, PTTs imposed via a deed restriction are strictly prohibited.)As noted above, the PTT task force also recommended that C.A.R. also sponsor a disclosure bill.  At the January business meetings a motion was approved by the Board of Directors that C.A.R. sponsor legislation to require a disclosure to potential home buyers as to whether the home they are considering purchasing requires the payment of a PTT, as well as the particulars of the PTT.  That measure, AB 980 (C. Calderon) would require recordation of a separate document that will enter the title record – and, thus, be disclosed in the preliminary title report – as well as a seller provided disclosure that will inform prospective homebuyers of the PTT payment obligation, the percentage of the home price constituting the PTT, the duration of the PTT, and the purpose for which the PTT funds will be spent.  If the separate document is not recorded, the homeowner does not have to pay the PTT.  AB 980 passed both houses of the legislature on overwhelmingly bipartisan votes as there was no opposition from any interest groups.  The measure is currently awaiting the Governor’s signature.So, what now?  Clearly, there is no political will within the legislature to prohibit the imposition of PTTs.  Nor is there the will to place reasonable restrictions on their imposition.  Consequently, absent some other solution, PTTs will continue to be imposed by developers.  One possible solution would be to expand the purposes for which Mello-Roos districts may be formed to include the funding of environmental mitigation and/or affordable housing – the primary purposes for which PTTs are now imposed and otherwise prohibit PTTs.  This would have the advantage of placing the funding for these purposes which would otherwise come from unregulated PTTs within the heavily regulated statutory structure that has been developed over the yearsfor Mello-Roos districts.  Moreover, such a move may serve to “pull the rug out from under” developers, environmentalists and housing advocates that are largely limited to PTTs for the funding of environmental mitigation andaffordable housing.Currently, Mello-Roos districts can fund the maintenance of parks, parkways and open space.  In addition, these districts can purchase real property for park, recreation, parkway and open space facilities.  Arguably, expanding the uses to which the districts can be formed to include funding environmental mitigation does not stray greatly from what can now be done with such districts.  The same cannot be said of affordable housing.  In fact, C.A.R. opposed SB 1432 – coincidentally authored by Senator Lowenthal – last year specifically because it would have allowed Mello-Roos districts to fund the construction of affordable housing, a clear departure from the current uses for which Mello-Roos districts are formed.  However, it should be kept in mind that measures such as this year’s AB 239 (DeSaulnier) which would have established a real estate transfer fee to fund affordable housing will continue to be introduced until a source of funding is found to address that issue.  Expanding the uses for which Mello-Roos districts are formed to include the construction of affordable housing may serve to “short circuit” attempts to establish real estate transfer fees for such a purpose.  (See the separate Issue Briefing Paper that has been prepared with regard to finding a permanent source or sources of funding for affordable housing.)  The same ends could be achieved by restricting PTTs to funding environmental mitigation and/or affordable housing.Finally, a mutually exclusive issue on which there is virtually unanimous agreement is the establishmentof a PTT by an individual homeowner.  There is at least one internet site which purports to have helped hundreds of homeowners establish a requirement that a fee be paid to them each and every time their home is sold. Some may argue that these differ little from the PTTs imposed by developers because those developers do not have to pay the costs associated with, for example, environmental mitigation and/or affordable housing and, thus, a financial benefit similarly accrues to them also.  However, a distinction can be made between the two in that in the case of the former the funds are merely going into the individual’s pocket as opposed to the latter situation which generates funds for some public benefit albeit one that may not directly benefit the homeowner having to pay the PTT.
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