Yesterday’s post provided a definition of private transfer fees and the rationale of developers who use them. Here are a few reasons why they are a terrible idea:
The fees are supposedly to fund the development’s infrastructure elements – the original infrastructure. Minnesota’s freeze/thaw cycle is very tough on exposed elements. Most infrastructure cannot last even 20 years without needing a major rehab or replacement. That replacement cost will be borne by either the current homeowners and/or the local government. So what is this 99 years nonsense?
If the development pro forma shows that the proposed house prices cannot directly fund the required infrastructure costs, then the development should not be built. Some developers say that these fees are only a temporary measure to help them survive in this difficult real estate environment. I say the fee is like a new “temporary” tax – once implemented, it never goes away despite the original promises.
Finally, these fees make it very difficult for later sellers to compete with similar houses that don’t have the covenant. Those sellers must now lower their price to compensate for the private transfer fee. The result is less net for the seller (aka equity stripping) while the buyer gets no benefit from the payment. It would be different if the fee went into the community’s capital reserve account. But it doesn’t.
Luckily, the Minnesota legislature agreed that these fees are outrageous. Legislation was passed in May 2010 stating that any new private transfer fees are void as a matter of law. Transfer fees already on record must now observe stringent notice requirements; failing to satisfy these requirements means the fee becomes unenforceable.