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September 2, 2010 |
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| January 23, 2008 |
By: Terry Sheridan |
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magine selling a piece of real estate, then collecting a fee every time the property changes hands — long after you owned it.
Freehold Licensing, a Texas-based intellectual property licensing group whose Florida office is in Fort Lauderdale, wants owners of any kind of real estate to be able to do just that.
The company has developed a transfer-fee covenant that would be placed on property titles. A type of deed restriction, the covenant would require buyers to pay the seller who records the covenant 1 percent of the purchase price each time the property sells.
When the fee is disbursed, Freehold would get 30 percent, the original seller would receive 50 percent, real estate brokers and title attorneys or agents would get 10 percent, a local charity chosen by Freehold would get 10 percent. The payouts occur each time a property is sold during the 99-year life of the covenant.
Sound too good to be true? The Florida Association of Realtors and Florida Bar Association’s Real Property Probate and Trust section think so.
The groups support legislation sponsored by Sen. Dave Aronberg, D-Greenacres, and House Bill 391 by Rep. Charles McBurney, R-Jacksonville, that would ban the kind of transfer fees Freehold promotes.
Freehold’s method “is clever but it’s a little too clever,” said attorney Burt Bruton of Greenberg Traurig in Miami. He is chairman of the legislative review committee of the Bar’s Real Property section and helped draft the proposed legislation.
Title attorney Michael Lyons of Lyons and Smith in Hollywood and Miami said the notion “hits me wrong in the gut. This is like a pyramid scheme in real estate.”
According to Senate Bill 464 and House Bill 391, Florida’s public policy advocates easily accomplished property deals. That means no title problems, unreasonable sale restraints or covenants that bind buyers without “touching” the property, or affecting its use.
The proposed law would exempt fees related to real estate commissions, loans or mortgages, leases, taxes, purchase options, condo or homeowner associations, and limits based on environmental cleanup. The bills would also allow covenants to be placed on four or more parcels payable to a nonprofit organization for cultural, education, charitable and recreational activities that benefit the community where the parcels are located.
If passed in the next legislative session beginning March 4, the ban will take effect July 1.
Freehold executives claim developers and owners of commercial and residential properties struggling in the current market slump could sell a property at a discount because they would reap proceeds from the fee for decades.
As the market improves, the sellers would also share in the property’s appreciation and subsequent increased sales prices.
The company calls the fee a “unique business method,” a form of intellectual property it says can be patented, thus giving it and its licensees exclusive use of the system. Freehold licenses its covenant, which has a patent pending, to a seller for a $249 fee.
Miami Beach attorney Rjon Robins, Freehold’s Florida operations director, said the tactic is simply an allocation of cash that would benefit any property owner.
Instead of developers, for example, trying to recoup infrastructure costs upfront with the sale of each lot, they could sell at a slightly lower price with the 1 percent fee covenant recorded with the sale.
Then every buyer would pay a transfer fee to a closing agent who would distribute the proceeds to various parties, including the developer — unless the developer removes the covenant or buyers negotiate to pay it off.
“The numbers are the numbers are the numbers. Everything I tell you is backed up by your calculator,” Robins said.
As off the grid as Freehold’s business venture may seem, it took enough root in Texas for lawmakers there to ban it for residential sales but not commercial deals. The thinking, Greenberg Traurig’s Bruton said, is that commercial buyers are sophisticated enough to know what they are getting into.
The Texas law, which became effective Jan. 1, sets up disclosure requirements for sellers of properties with liens. It also bans transfer fee covenants and voids any covenant that violates the law. It does not apply to fees paid to nonprofit organizations.
The Texas law was proposed because of Freehold’s efforts there, said Daniel Gonzalez, legislative affairs director for the Texas Association of Realtors.
The company began its operations near Austin in 2005 and has since opened offices in Fort Lauderdale as Freehold of Florida LLC, as well as in Las Vegas; New York; Westlake, Ohio; and Ridgefield, Conn., said J.B. Alderman of Freehold’s Texas office.
Each operation is a limited liability company and most are owned by groups of attorneys, Alderman said. He declined further comment, saying Robins is the company spokesman.
Gonzalez said the concern within the Texas real estate industry was how transfer fees would be tracked for 50 years or more.
“One of the arguments we used was why a person who owned a property 10 years prior should receive a benefit from any addition or remodeling done by a current seller,” he said.
In Texas’ next legislative session in January 2009, the real estate group will seek to extend the covenant ban to nonprofit organizations.
While Robins contends the covenants make properties more marketable, Bruton and Florida Association of Realtors’ legislative counsel Trey Goldman contend the fee is a minefield for buyers, real estate companies and title attorneys, and raises questions of disclosure.
Most buyers, for example, make offers and enter into contracts before a title search, which would reveal the covenant.
Many purchase contracts permit restrictions “common to the subdivision,” such as homeowner association fees. So if a developer sold 100 lots as a subdivision to a builder with the 1 percent transfer fee included on each lot, that could be considered “common to the subdivision” and leave the buyer unprotected, Bruton said.
“It’s a trap and a surprise to spring on people,” he said.
Bruton, citing various law publication articles analyzing the method, said the covenant is set up so that only the original seller can undo the covenant. Subsequent buyers have to buy [the covenant] out at 5 percent of the purchase price.
Not so, said Freehold’s Robins, who was interviewed by phone and e-mail for this article.
“There are no involuntary parties to a transfer fee transaction. No one must do anything,” he said.
Buyers and sellers can negotiate their own terms to make a deal work when a covenant is in place. If a buyer wants to remove the transfer fee, which is considered an asset of the original seller, the buyer could offer to pay the seller to kill the covenant.
The idea gets even more rarified. Freehold’s Web site outlines how commercial property owners could carve out transfer fee rights on large projects and sell them as a separate asset. That asset could be pooled with others and securitized by selling the expected income stream to investors. That would give the sellers a lump sum payoff.
“Lawyers and Realtors who have not taken the time to investigate the facts about how transfer fees actually work often mistakenly claim the obligations undertaken by successor owners are not voluntary,” Robins said. “No one is an unwilling participant to a transfer fee unless they are represented by incompetent legal counsel or an incompetent title agent who fails to inform them of the existence of a transfer fee before they buy the property.”
Though Freehold contends the covenant is no different from oil or mineral rights on a property, title lawyer Lyons said that’s inaccurate.
“With oil rights, I have to do something to exercise the right — enter one’s land and drill or excavate. In this scheme, you merely profit from the exchange of title. It’s a passive income and you’ve done nothing to earn that right.”
Although Freehold Licensing’s Web site says more than 13,000 properties carry the company’s covenant, neither Robins nor his affiliated real estate brokers, Natalie Feldman of Eisner Feldman & Grant in Clearwater and Jim Wolff of Kester Brothers Realty in Pompano Beach, supplied names of sellers or buyers in Florida who’ve dealt with the system.
Wolff, who said he has worked with Freehold for about a year, hasn’t done any deals involving the company’s fees. Wolff said he owns vacant land that he may put covenants on.
Feldman said she’s worked with Freehold for about nine months, has the company’s covenant on her own home and has done several deals involving the fees. She wouldn’t disclose the properties or the principals involved in the deals.
“The benefit to buyers is a slightly lower initial cost and, of course to the seller, it’s perpetual income that comes with recapture of the reduction in the sales price,” she said.
While Feldman said her buyer-customers, whom she declined to identify, didn’t object to the transfer fees, the model’s newness may frighten some people.
Freehold contends transfer-fee convents aren’t new, only the version it’s seeking to patent.
The company claims giant developer St. Joe Co. in Jacksonville has placed millions of dollars worth of transfer-fee covenants on some of its projects in northern Florida that are used to fund a foundation St. Joe created almost 10 years ago.
Robins said Freehold also works with nonprofits but he declined to identify them.
The developer pays its St. Joe Community Foundation one-half percent of the initial sale price of each property in selected communities where each property has a transfer-fee covenant.
Subsequent payments continue through recorded covenants requiring buyers to pay the foundation a transfer fee each time a property is sold.
The fees fund the foundation’s grants to the “civic infrastructure” to bolster education, health care, environmental and local cultural interests.
That’s similar language to the exemption in the proposed legislation for fees paid to nonprofit groups that provide community benefits.
When asked if the language was crafted with St. Joe in mind, Greenberg Traurig’s Bruton said a member of the Bar’s Real Property section suggested it during the group’s discussion of the bill.
“If the nonprofit community outreach program benefits the community where the transfer fees apply, then those transfer fees would be enforceable under common law and would continue in force under this bill,” Bruton said in an e-mail.
Terry Sheridan can be reached at tsheridan@alm.com or at (954) 468-2614.
Rjon Robins photo by Melanie Bell
Correction
This story incorrectly reported that the practice is banned in Texas. The law in that state only prohibits buyers from paying a transfer fee; it does not prohibit sellers from paying the fee. The Review regrets the error.
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