U.S. set to abolish transfer fees unless co-op/condo boards act
“If this rule is implemented, we’re screwed,” says the prominent New York attorney and co-op advocate Stuart Saft, a partner at Dewey & LeBoeuf, – only he didn’t use the word screwed. “This rule is arbitrary, capricious, and will destroy one important source of financing in the co-op and condo community.”
What has gotten him so incensed is a new rule the federal government has proposed – but not yet implemented – that would restrict Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from making loans to buyers on properties encumbered by a “Private Transfer Fee Covenant,” more commonly known in New York as a flip tax.
It comes down from the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks, which are government-sponsored enterprises that provide more than $5.9 trillion in funding for the U.S. mortgage markets. The FHFA is proposing a “guidance” for public comment that would restrict all three entities from investing in buildings with private transfer fee covenants.
“FHFA’s primary intent is to stop developers from imposing 99-year covenants on new homes that require sellers to kick back a percentage of the sale price of the home to the developer when the homeowners sell their home,” says Saft. While this is not a prevalent practice in New York, it has gained popularity in the Southwest and in Florida.
Saft wrote to the FHFA, pointing out that this move would probably be devastating to housing associations in New York City. Unlike the homes and associations being targeted by the FHFA, New York’s properties use transfer fees for the overall benefit of the building, and not for the profit of the developer. Besides being fiscally prudent, argued Saft in his letter to the FHFA, didn’t such a move fall in line with the FHFA’s existing policy that boards reserve a percentage of each year’s budget to fund present and future capital repairs? A major source of such income is flip taxes.
Another problem, notes Saft, “is that a co-op can’t just wave a magic wand and say, ‘Transfer fees go away,’ because these transfer fees are part of the proprietary lease and the bylaws. The most the board can do is try to get two-thirds of the shareholders or unit-owners to vote to take away the transfer fee from the governing documents. The problem is it’s so difficult to get two-thirds of the owners to agree.
“These transfer fees were imposed for a very valid reason, and that is that the corporations need money to maintain their aging housing stock,” continues Saft. “And the FHFA is turning around and saying, ‘We don’t care that this has worked well in New York for over 20 years.’ This is just a bureaucrat saying, ‘This is what our policy is going to be,’ without looking a the consequences.”
The public comment period, which ends on October 15, is the only time when co-op and condo owners can have some influence on this decision. Besides writing to the FHFA (email@example.com. Please include ‘‘Guidance on Private Transfer Fee Covenants, (No. 2010–N–11)’’ in the subject line of the message.), concerned owners should contact Senator Charles Schumer (http://schumer.senate.gov/new_website/contact.cfm) and Representative Carolyn Maloney (http://maloney.house.gov/), two of New York’s more influential politicians on this matter.
“Tell them that this is wrong,” Saft says. “Point out that there is nothing to be gained by this rule and that it will create a very serious problem for all of this aging housing stock. They’re worried about people defaulting on their loans and yet they’re doing something that will trigger more defaults.”