In times of turmoil, innovative ways to earn an extra dollar are often created. One such creative concept is the funding of land development with a transfer fee covenant.
Here’s an example of how this might work: A developer agrees with an investor to record a document affecting all of the land in the development, stating that for a specified period, every time a lot changes hands, a fee equal to a certain percent of the sales price will be paid to the investor by the seller of the real estate. The investor in turn gives the developer money.
The benefits of these fees can be to pay down debt and increase liquidity. Developers might also sell the real estate for a lower price for much needed capital, and buyers will buy for less in return for paying a fee in the future.
Despite the potential benefits of these fees, these types of arrangements have sparked major debate in the real estate industry, as well as in the legislative community. The main complaint is that these types of arrangements are encumbrances to the marketability of real property and cloud future transfers of real property.
Various states have enacted legislation in response to these arrangements. In Texas, Texas Property Code Section 5.017, prohibits and makes void any deed restriction or covenant running with the land that requires a transferee of residential real property to pay a declarant or other person imposing the deed restriction a fee in connection with a future transfer of the land. Some have circumvented the property code by stating that it only applies to residential situations, and that the term “transferee” means “one who is acquiring title,” referring to a particular place and time, not to an individual. This means at the time of a future sale, the person who originally was the transferee is now the transferor (the person responsible for paying the fee).
Regardless of the benefits of the fees, or whether the Texas Property Code voids these fees, in practice they’re costing a lot more than they are creating. Most lenders and buyers require the restriction to be terminated, so they don’t have to be affected by the fee. A much larger fee is then required to allow for the property to be immediately released from the restriction.
However legislatures ultimately handle these restrictions, it’s quite possible that the restriction will slowly disappear or diminish in practice as required by the industry itself.