I cannot believe that the biggest hippie state which constitutes most of the "Left Coast" of America, could not find the legislative impetus to pass a ban on this.  That is not to say that I am in favor of such a ban.  In fact, the middle-of-the-road response by this state represents a fair and balanced response to these covenants;  force disclosure and let the free market decide. 
 

  I guess that we could look at this as a middle ground and see how it works:  a (nominally) democratic experiment in the free market that might point the way to the type of rational legislation that is hard to overturn.  The tax payers of the other 15 states which banned this outright could be in for some court costs as challenges are brought forth in each jurisdiction.

  Weird, weird, weird world.

Robert, you keep looking at the negative of Freehold and never discuss the positives.  Why not follow California and require stutory disclosure and let the market decide where to go?  

 If I can buy a house with an amazing amenity package and pay 10% less than I would otherwise because I am sharing the cost of the infrastructure with other owners of the home over 99 years at a cost of 1% per sale transation, why not?  My neighborhood in Florida has a .5 percent transfer fee paid to the St. Joe Foundation at each sale and I did not get a discount ont he home price.

Further, the are many developments languishing because banks won't finance development in this recession.  We need creative financing to get through this recession.  Why not try this on a temporary basis during the recession?

If the developments are securitied most of the money funded would NOT go to developers who sell and leave but to the Community Banks that are holding the notes on underwater projects.   The banks would then have problem notes resolved and would have more money to lend to others.

Finally, I'm pretty sure the 600 billion of developments is fully built out values.....and many of these would take 7-10 years to build out. It would also include commercial developments for which most of the bans...such as Texas do not apply.  Freehold could securitze these on commercial developments alone for more than the $94 billion fugure you mention.  For these reasons your disparaging comments about the capital recovery fees are inaccurate and a disservice to situations where they could be useful...even if for this recession alone. 

First, Peter, thank you for your comment.  I guess to answer your question I'd have to say that I don't see any positives when it comes to private transfer fees.  I don't think that it will be possible to securitize them, thus, developers will not be able to sell them to get this "injection of capital" to help during this recession, or ever.  They are not enforceable under the common law, so who would buy the securities?

Second, I think you helped make my point.  You have a transfer fee on your property and apparently didn't get a discount on your home.  I believe that would be the same with these covenants.  I don't think the discount would ever materialize, or if it did, it would soon disappear. 

Third, even assuming that the "build out" would take 7-10 years, I have a tough time believing that there is $600 billion worth of property encumbered by these covenants.  That is an incredible valuation that I just find hard to believe is anywhere near accurate.  It might help if Freehold would be more forthcoming about their clients and the specific projects involved.  I guess you can call me a skeptic.

Robert,

Your article brings up an interesting development regarding "financial engineering" which I believe may find some acceptance in some circles.

I can't remember the Senator who proclaimed that "new financial engineering" is simply finding a way to impose a transaction fee, sit back and wait for the checks to start rolling in!

I came across the following instrument in the Wolf Lake Airport development in Alaska which may illustrate some evolution ahead  in dealing with "transfer fee" type financial conventions.

http://www.landtechdata.com/docs/AK-PRD-2002-013097-0.pdf

In this particular instrument an easement is granted in perpetuity to the runways and taxiways excepting certain conditions in Provision 4.

However, in Provision 6, 2nd paragraph, a fee is then to be paid by any subsequent successor obtaining title from the original grantees.

Here's a couple of issues which pop-out at the start:

If a fee becomes involved then an easement ceases. It becomes a lease or license.

"A Treatise on the Law of Easements" by Leonard Augustus Jones states at Pages 65 & 66:

"An Easement is distinguished from a license, though it is often difficult to make out whether a particular case is the one or other. There are, however, certain fundamental principles underlying most of the cases, which enable courts to distinguish an easement from a license... An easement implies an interest in the land, which a license does not.

An easement is a "permanent interest" in the real estate, while a license ... may be revoked ...!

An instrument which conveys an interest in land for a definite term is not a license but a lease."

This particular instrument seems "contradictory" in that an easement is granted forever and in perpetuity yet at the same time it can be revoked, modified or terminated by some subsequent act.  

In effect, what is being proffered here is  Wolf Lake Airport, Inc./D.E. NorthFork, LLC and any successor entity can assess any amount of "user fee" unilaterally! It can be any amount arbitrarily without any recourse by property owners!

This seems to pass the test you enumerate by Judon Fambrough and Harold D. Hunt in that the fees are necessary for the maintenance of the airport, therefore "touch and conern the land".

Another issue would be the effect if it were a license, then those, for whatever reason, who decide they don't want to pay or use the airport causes a greater burden/responsibility on the remaining property holders who do. It's a little Catch-22 as an aside issue.

Would you think that creatively segementing rights such as "development rights" into instruments of license or lease be another design by which "transfer fees" could be established?

Couldn't the idea of 99 year licenses or leases be substituted for "fee simple" and "first mortgage rights". Reverse Mortgages were rather creative.  I'm certain there will be some creative financial vehicle by which some will sit by the pool counting the automatic deposits from the real estate transaction.

I'm curious as to your thoughts if Wall Street called and said, "Robert, create us some 'transfer fees'"!
 

As to the Texas law, a detailed legal opinion from a prominent national law firm concurred with numerous Texas firms when they wrote, "we are of the opinion that, in a properly presented case, a court in the State of Texas applying Texas laws would enforce the provisions of the [Freehold] Declaration."

In Texas, it is also a rule of statutory construction that the express enumeration of particular persons or things in a statute is tantamount to an express exclusion of all others. (Ex parte Mclver, 586 S.W.2d 851,856 (Tex. Crim. App. 1979) (superseded by statute on other grounds as stated in Ex parte Johnson, 697 S.W.2d 605 (Tex. Crim. App. 1985)); see also 67TEX. JUR. 3D Statutes §119 (1989))

Further, HB 4219 intended to amend TPC 5.017 section (b) by adding "a transferor" as a party prohibited from paying a fee on the transfer of a property. In interpreting a statute, Texas courts recognize a presumption that an amendatory enactment intends to change legal rights. 'See, eg, Ex parte Trahan, 591 S.W.2d 837, 842 (Tex. Crim. App. 1979) ("In enacting an amendment the Legislature is presumed to have changed the law, and a construction should be adopted that gives effect to the intended change, rather than one that renders the amendment useless.") (citations omitted); American Surely Co. v.
Axtell Co., 36 S.W.2d 715,719 (Tex. 1931) ("It will be presumed that the Legislature, in adopting the amendment, intended to make some change in the existing law, and therefore the courts will endeavor to give some effect to the amendment")  If, as has been suggested, the ban is already absolute, then no amendment would be needed.

The bottom line is that to construe the statute as some have suggested (e.g. to bootstrap the heirs and assigns language into a total ban), would render meaningless the term "transferee", which flies in the face of the rules for statutory construction.

Touch and concern is a common law concept, yet when a statute exists the common law does not apply.  Therefore, T&C is not an issue in Texas.  Even if it were an issue in Texas, there is a wide body of case law that says that when a fee or obligation is used to reimburse a developer for infrastructure costs, a sufficient nexus exists between the benefit (e.g. the streets and utilities) and the "burden" (the fee). 

Mr. Alderman,

You write "If a developer can create the future fee, lower the sales price today, and sell off the future income stream, there is a very positive ripple effect. The bank loan is paid down, the homebuyer can buy for less, foreclosure is prevented, bank failures are reduced, and jobs are created (when failed projects are restarted). The alternative is to sit and wait for a recovery in real estate prices (which is unlikely to happen within a reasonable time period) and to endure high unemployment, bank failures, taxpayer bailouts and more."

What you're saying in simple terms is there's no amortization of the financial model you propose. Isn't this tantamount to a lender proposing to give you $10k in addition to a loan of $100k so you can buy a $110k property. And for being so benevolent you are now obligated along with your successors in title to paying on the $100k mortgage "forever"?

You argument might have merit if you had some "finite" amount but I understand this to be a perpetual proposition. You could only establish these so-called cash flows from a statistical analysis of property turn-over rates. And I have a hard time reconciling the ups and downs of real estate markets and why an inducement of future-transaction cash flows are necessary to alter market conditions.

Your proposition reminds me of the Turnpike Authority here in Florida. Tolls were to be levied up until the project costs were repaid with interest. That event occurred many, many years ago. Guess what? They just raised the tolls on the Florida Turnpike!!

I suppose we could apply your idea to automobiles so car dealers could sell off the future income streams thereby selling the cars cheaper and preventing repossessions! Gosh, this might be an idea Walmart could use!!

Let's see? Give me a perpetual cash flow and I'll make it cheaper. Is there any chance the first person buying could get it for free and subsequent property owners would pick up the tab? I'll bet that would restart the real estate market!! With this kind of financial model applied to all commerce we could get this economy humming beyond imagination.

Imagine a title policy that binds to the property which is issued for less than promulgated and locks in a fee forever. These underwriters would have a heyday.

And futher this could possibly deter or influence future transactions. Suppose a neighborhood or development is on the downswing or deteriorating as a result of metrics beyond anyone's control. Traffic patterns change, zoning changes or any number of factors. Now you have this "obligation" sitting there which could easily become a "selling issue"!! 

Wyatt:  If Wall Street called to ask me to "create some transfer fees," I'd ask for my money back.  Lord knows Wall Street has taken more than its fair share already!  I'll look into to the airport document later, when I get some time, and let you know what I think.

J.B.:  I think you should ask your "prominent national law firm" for your money back, too.  Clearly they were wrong.  Do prominent national law firms offer a money back guarantee?  It isn't just my opinion anymore, this also seems to be the position of the Real Estate Center at Texas A&M and the American Bar Association. 

As I have said before, we'll have to wait for a Texas judge to let us know. 

I have several problems with the Freehold Scheme.

1.  99 years isn't perpetuity, it's probably designed to comply with the Rule against Perpetuities.  But not every jurisdiction uses 99 years, some still use the common law, some use 90 years.

2.  Is it a covenant or a lien?  If it's a pure lien, it could be wiped out in foreclosure.  If it's a covenant it has to be policed or else one or two scofflaws can invalidate it for everyone.  Once these start to get invalidated, the entire market Freehold created will crumble.

3.  It's an imprecise way to recoup expenses, when better methods already exist.  Improvement districts, traditional covenants and HOAs, and the like have set fees (not percentages) to recover costs for improvements AND MAINTENENCE over time so that all who enjoy them pay for them. 

4.  Speaking of Maintenance, the touch and concern argument Freehold uses fails when years down the line, property sellers are forced to pay a fee for infrastructure that has been replaced or maintained by someone other than the party they're paying. 

5.  The example Freehold uses of a 2% break on the home price is paltry compared to the 15-16% repaid to them on increasing home values over the course of the 99 years.  I base the 15-16% on the rule of thumb that a home sells every 6 years, leading to the resale fee being applied 15 or 16 times on average.  The fee is due to be paid even if the home is sold for a loss.  When a person is foreclosed on, they may be a step away from bankruptcy, and these guys will almost certainly become the scofflaws in point 2 above.  (not to say there won't be other scofflaws houses are sold every day with no title company involvement, a home seller can prepare their own deed leaving out Freehold's magic language)

6.  On one hand Freehold says, "there is a benefit to the property seller because he's able to sell for less, making the home more attractive, and there is a benefit to the buyer because he's able to buy for less."  But on the other hand they say, everyone is getting what they paid for, the markets will adjust.  I can not buy the argument that the sellers are getting a benefit when they are buying and selling a home for the fair market value.  If Freehold's argument worked, the government would really be able to go into overdrive with eminent domain..... "Yeah, were gonna take 15 feet off the front of your lot, and we're not going to pay you money for it because we are conferring the benefit on you that when you do sell your property, you'll be able to sell it for less and therefore sell it faster... plus we've put you closer to the road and shortened your commute"

7.  Speaking of Fair Market Value, it will take several sales inside a development using Freehold's scheme to establish a true gauge of what the Fair market value is for one of these properties.  I would guess it would take a decade to get decent comps.  And the gauge will always be adjusting, so that towards the end of the 99 years the values should come up again.  However, I haven't met very many appraisers who put that much deep thought and deliberation into the values they place on a home.  Essentially the first 3 or so owners of any given home in this scheme are likely to get hosed as the true impact of this on the home value settles in, and the last 2 or so will reap a windfall.   Wait I see it now, Freehold will now argue that the first 3 or so are the ones benefited by the infrastructure, and the last two or so are benefited by the windfall.... got it.  

8.  I foresee that when property owners see what the true impact of this is on the property value, they will become apathetic towards home maintenance and improvements, and the neighborhoods will decline.  Why should they put money into a home that the next buyer will discount based on the Freehold cloud on title.