Private Transfer Fees - A Hidden Tax

As part of my work with the California Association of REALTORS, I have been at the forefront of “outing” a practice that many builders have instituted to avoid further delays in getting their projects completed. The California Association of REALTORS (C.A.R.) has described it as Private Transfer Taxes. Oh, but it won’t be described that way when you go to purchase a home with a builder who is using it. It may be described as a builder fee or another creative term the builder has come up with.

Here’s the scoop:
A Private Transfer Tax (PTT) is a fee imposed by an owner (Developer in most cases) of private property upon the sale or transfer of that private property. In many instances, the fee is not paid upon the first transfer (from Developer to 1st buyer), but instead kicks in upon the subsequent sale(s) of that private property. Essentially, this is contract between the seller (Developer) and the first purchaser of the property to encumber each subsequent purchaser of that property.

C.A.R. has found PTT fees can be anywhere from .5% to 1.75% of the purchase price. Let’s do the math: On a home selling for $500,000 (a modest home in Ventura County), the fee could be $8,750!

Who pays for this? Either the seller or the buyer in a real estate transaction because all aspects of the deal are negotiable. In any case, this adds to the closing costs on either side of the transaction and can result in making the home less affordable and/or less desirable for prospective buyers. Since these fees are being imposed by builders of large development projects, it could quickly affect the resale value of the properties within that development. With the market already sliding, those first and subsequent homeowners could be stuck in a property that they can only get out of through short sales or foreclosures. If a buyer absorbs the cost, will the bank finance this fee? Probably not.

So who benefits from the monies collected by imposing PTTs? Well, that depends on how the builder set up the PTT. In some cases, environmental groups, charitable organizations and relief organizations. It’s the builder’s choice and you, the consumer, don’t get to say where your money goes. These monies may not even stay within your community! Why should you be forced to pay for someone else’s cause simply by purchasing a home? And, did I mention that there is no oversight to ensure the monies are distributed according to the terms of the recorded document?

C.A.R. sponsored legislation to prohibit the use of PTTs. The building industry and environmental groups lobbied heavily to oppose the bill and, subsequently, that piece of legislation was defeated in committee and therefore never made it to a vote on the California Senate floor. Look for another form of this legislation to come up again in the near future.

C.A.R. has also sponsored legislation to disclose the existence of a PTT when a property is being sold. This bill is AB980 (Calderon) and is currently scheduled to be heard in the Senate Judiciary Committee. So far, there appears to be wide support for this bill.

My understanding is there is at least 1 builder in Ventura County that imposes a PTT. If you own a home in a newer development, check the documentation given to you by the builder and read it carefully. You can also check with your local REALTOR to find out if a PTT has been recorded against your property. There may not be anything you can do to reverse the PTT, but if you have one - you should at least know about it.

To my knowledge, there has not been a case tested in the legal system to challenge the legality of the PTT. If I become aware of a case, you can read about it here.

Remember this: There is...
...No Oversight or Accountability
...No Limit on the number of separate PTTs per property
...No Limit on the actual amount of the PTT
...No Limit on the length of time the “fee” will be imposed

Do you know of someone with a PTT? Let me know all about it. Have they tried to sell their property? If so, did they disclose the existence of the PTT? Please comment and let me know about it. I will forward your examples to C.A.R. so they can be included in our lobbying efforts to stop this Hidden Tax practice.