Are Private Transfer Fees truly a threat to the free transfer of property?  Some would agree.  Regardless, they sure are causing a problem for title companies.

As an outsource provider in the title insurance process, we are at the forefront of current events and issues facing our industry. Recently we have been involved in the development of safe search practices surrounding Private Transfer Fees (PTF’s).

For those unfamiliar with PTF’s, developers of real estate (not exclusively residential) have placed what can only be described as a perpetual lien on entire tracts of property to assist in the recovery of development costs - particularly infrastructure outlays such as streets, sidewalks and open space.

The mastermind of these fees is Freehold Capital Partners based in New York City. They have what their company claims is a patent-pending structure to perpetually encumber future conveyances of real estate and transmit a private transfer fee, also referred to as a capital recovery fee, back to the trustee, commonly the developer or other organization specified by the developer. These fees are due and payable at each conveyance for a specified time period, commonly 99 years, and at a specified percentage of the sales price, typically 1%. Freehold, whose name is somewhat ironic, claims that their company has partnered with the owners of “hundreds of billions of dollars in real estate projects” since inception.

Why are these fees a struggle during the search process? Due to the infancy of this concept, the legal instruments securing these fees are unregulated, unstructured and often hidden in a condition or covenant-type document. The legal instrument mandating these fees is also only filed once at origination of the PTF. Common industry search practices such as searching back to the full value deed or other starting point of “good title” will result in missing these encumbrances should they have originated prior to that point in time. Also, without specifically named parties which to secure these fees (you can’t name an unknown future owner), these documents are near impossible to find in thin plants and other party name structured databases raising questions as to their viability.

The American Land Title Association has officially taken the position that these fees are a hindrance to the transfer of property. ALTA CEO Kurt Pfotenhauer has said that PTF’s “will result in increased costs of underwriting, claims, escrow services and compliance for the land title industry.” Freehold Capital Partners claims PTF’s assist in the fair apportionment of up-front costs and reduce sales prices, thus lower acquisition, interest and closing costs to each subsequent buyer.

Pros and cons aside, legislative restrictions on PTF’s are picking up steam across the country. California and Texas have limitations on these fees, and 15 states - most recently Hawaii, North Carolina and Louisiana - have completely banned the use of anything resembling a PTF. Presently, legislation is awaiting the governor’s signature in Illinois to ban PTF’s in that state as well.

As an outsource provider serving on a national level, it is interesting to see PTF procedures considered by our clients and how they vary from state to state.   Until more widespread legislation is passed, perhaps on a national level as our industry lobby is pursuing, it will remain another evolving complexity facing our search process.