AIP - Norman Spencer
DRN Title Search
Register
Log In
Forget your Password?

Home
Directory
Bulletins
Forums
Blogs
Articles
Links
Classifieds
About Us
Contact Us
Advertise
FAQ
Privacy Policy


Source of Title Blog

Freehold Capital Partners Testifies Before Ohio Senate Committee
by Robert Franco | 2010/03/06 |

As you know, Ohio has proposed legislation to ban private transfer fee covenants.  This past week, a Senate committee held a second hearing on the bill and I was able to make it to the Statehouse to attend.  In favor of the bill was the Ohio State Bar Association and the Ohio Land Title Association.  In opposition, a representative from Freehold Capital Partners.  The interesting thing was that the issues addressed have all been debated here on the Source of Title Blog.  I guess you could say that we have been ahead of the curve!

Source of Title Blog ::

On Wednesday, March 3, the Ohio Senate Judiciary-Civil Justice Committee held a second hearing on H.B. 292.  This bill is the one I have previously written about that will ban private transfer fee covenants in Ohio, if passed.

I was in the office on the morning of the scheduled hearing and I just happened to check the status of the bill when I noticed that it was scheduled for a hearing at 2:30pm.  I cleared by calendar for the afternoon and drove to the Statehouse out of curiosity.  I'm glad I did.

There were two proponents of the legislation testifying.  This first was attorney Steve Buchenroth, an attorney with Vorys, Sater, Seymour and Pease LLP in Columbus, Ohio.  He testified on behalf of the Ohio State Bar Association Real Property Section, of which he is a member of the Section Council.  The OSBA conceived the proposed legislation and, of course, urged the committee that it be enacted.

The OSBA does not support transfer fee covenants.  The covenants could cloud titles for an extended period of time.  The original holders of the covenants could be difficult to track down to obtain releases.  The covenants have no apparent economic merit other than to create an undeserved windfall, but would cause a nuisance for the title industry.

The second proponent was attorney James Havens, whose firm represents and litigates for title insurance underwriters.  He is also the president and founder of Cardinal Title Insurance Agency has has been a licensed title agent for more than 25 years.  Havens is a member, and testified on behalf of, the Ohio Land Title Association. 

  • These covenants hinder the safe and efficient transfer of real property.  These covenants create an unnecessary and unacceptable risk for lenders, homeowners and land title professionals.  They make the transfer of real property more costly and less certain.  The long, 99-year timeframe of most of these covenants increase the chances that these restrictions could never be known by the homeowner or are undiscovered during a search of title records.  Further, the long timeframe makes it likely that beneficiaries of these covenants will never be found due to death or dissolution.

  • These covenants reduce transparency and exploit the complexity of real estate transactions.  These opaque and confusing covenants are hidden from consumers buried in a veil of legal documents. They can often be difficult for even experienced professionals to comprehend, much less be understood by consumer.

  • These covenants erode fee simple title and restrain alienation - the unrestricted right of an owner to transfer property.  They may be subject to legal challenges as courts have been unwilling to recognize or create new interests in land and they fail the common law "touch and concern" test, which requires that covenants benefit and burden the land.  The American Law Institute argues that these covenants are "arbitrary, spiteful, capricious" and an "unreasonable restraint on alienation" and "unconscionable."

  • Private transfer fees depress home prices.  When a private transfer fee covenant is attached to a property, it causes the value to be decreased due to the built in nature of a fee encumbrance.  Everyone can agree Ohio home prices do not need to be depressed further.

"The Ohio Land Title Association is pleased the General Assembly is addressing this issue before it becomes as pervasive in Ohio as it has in other states," Havens testified.  "OLTA joins the OSBA, the Ohio Association of Realtors and others in supporting this critical bill."

There was one lone opponent of the legislation who testified, Joe Alderman, CEO of Freehold Capital Partners.  Alderman did not have a print-copy of his testimony to submit to the committee, so I apologize that I cannot quote him verbatim.  However, the impetus of his testimony was that the covenant was designed to inject liquidity into development projects.  Basically, through securitizing pools of covenants, developers would have much needed access to funds to complete their projects and buyers in the subdivision would benefit from lower acquisition costs.

He testified that, given the choice, buyers would rather pay $245,000 for a home knowing that they would be required to pay a 1% transfer fee when they sell, than pay $250,000 for the same home without the future obligation.  As has been argued by Freehold proponents on this blog in the past, buyers are free to negotiate a reduced purchase price in return for the obligation.

Alderman also testified about the legislation in other states.  First, he mentioned the Texas legislation doesn't prohibit transfer fees, but only requires that they be paid by the seller, not the buyer.  This has been debated on this blog, too, and I disagree with his interpretation of the Texas statute. 

He also mentioned that the other states that have passed bans on the Freehold-type covenant did so without the benefit of public hearings.  If that is true, it is shocking.  I do not believe that legislatures should ever pass laws without holding public hearings.  But, either way, I do believe that they were acting in the best interest of their citizens with the approach they have taken to eliminate private transfer fee covenants.

Lastly, Alderman explained the California legislation, which is centered around requiring disclosures whenever a property is sold with a Freehold-type covenant.  This is the approach he urged the Ohio Senate committee to adopt, rather than an outright ban.

After the hearing, I got the opportunity to meet briefly with Mr. Alderman.  I spoke with him on the phone a couple of years ago, but this was the first chance I had to meet him in person.  As one would expect, he seemed to believe in the value of the Freehold covenants and sees them as a useful tool for developers and consumers alike.  I got the impression he was sincere about it.  Despite the fact that the program has been described as a "scam," or a "sophisticated pyramid scheme" as one a Kansas Senator wrote, I do not believe that Alderman is out to "rip anyone off." 

He tried to persuade me to his line of thinking, but we just have very different opinions on the issue.  We managed to find some bit of common ground on the issue of required disclosures, but that was still a bit contentious.  In a perfect world, there would be theoretically nothing offensive about the covenant if every buyer and seller were aware of the covenant and negotiated in good faith to take it into account in reaching a fair sales price. 

I believe that there would still be some negative implications.  Even with the disclosure, there may be problems selling homes encumbered by the covenants.  Some homeowners might find that they can't sell without a drastically reduced sales price - even less than they thought it might be when they negotiated their purchase price.

But, beyond that, we don't live in a perfect world.  It would only be a matter of time until someone bought a home unaware of the covenant.  He would pay full fair market value and still be burdened by the required payment at the time of sale.  Such a homeowner would lose significantly on the transaction - he would have to pay the missed transfer fee from when he purchased the property, his transfer fee, and he would have to sell the home at a loss.  Mr. Alderman's response was that this can happen with any type of missed encumbrance and the owner would be able to go back on his predecessor in title to recover his losses.  He may be correct, but it seems to be a better course of action to protect homeowners from having to worry about this scenario through well-crafted legislation.

It was nice to be able to attend the hearing.  I haven't had the opportunity to do that since my internship in the Ohio Senate when I was in law school.  And, I was glad that I got an opportunity to meet Mr. Alderman.  Although we don't see eye-to-eye on the issue, he was a genuinely nice guy and it was a pleasure to meet him.  I have enjoyed the legal debate over the issue and from an academic perspective I have learned a lot more about real covenants than I otherwise would have.  There will certainly be more on this topic as it gains national exposure.  There was even an article in today's Washington Post.

Robert A. Franco
SOURCE OF TITLE




Rating: 

Categories: Ohio Legislation, Title Industry, Title Problems

2132 words | 6801 views | 13 comments | log in or register to post a comment


Transfer Fees - Disclosure

Robert:

I posted once before that the Freehold transfer fees are the only way my developments can self finance to pay the local FDIC banks and continue the development.  I appreciate your open mind and thoughful opinions on the subject.  I am an attorney and investor in neighborhoods who is now the developer because my former partners are bankrupt.  This is a horrible market.

If the Freehold financing works out my developments will finish out in the highest quality way that will benefit the Phase I owners - and the banks will be paid 100% on the dollar.  Otherwise, I will have to be a Walmart of neighborhoods to survive this market.  Freehold financing would afford a far superior product. 

I will add this important point about your comments and reasoning about disclosure and the subsequent "buyer unaware."    I live in a St. Joe neighborhood in Florida.  Every house and lot and condo sold has a transfer fee on it.  We all know this when we buy.  Realtors don't reduce their commissions.  No one buys here who is not be aware of this.  It would be different if this was an isolated house with a random covenant. But when you buy where an entire neighborhood or entire phases have covenants you have to be pretty stupid to not see the covenant in your title work. The covenants are common knowledge and always will be. 

If there is any concern at all, I would direct it toward disclosure legislation rather than removing what could be a practical way to have developments self finance and to spread the cost of higher quality developments over numerous buyers over the years and to not have to factor in the amenities, etc. into the lot price of the first buyer. 

 
by PETER JOHNSON | 2010/03/08 | log in or register to post a reply

I understand your predicament...

I can certainly see where it would be great for you if you could monetize a Freehold-type covenant to get a lump sum of cash to finish your development.  However, there are two problems with that.  First, I don't think it yet possible to get a lump sum payment from the covenants.  As I understand it, securitizing pools of covenants is being considered, but it is not yet a reality.  Second, Florida has already passed legislation prohibiting the covenants.  (See Fla. Stat. § 689.28.)

I understand that transfer fees are quite common with condos.  It is a popular way to fund condo associations.  The Florida legislature even crafted an exception for condo associations.  Generally, when people buy condos they understand that they will have condo fees of some sort and they are not surprised by such legitimate transfer fees.  However, when the property is not a condo, they wouldn't typically think the property would be so encumbered.  

The Bill Analysis for the Florida legislation states:

It is alleged that homebuyers are often not aware of a transfer fee on their property until they appear at closing because the existence of the fee is listed in fine print in the covenants, conditions and restrictions.  From an economic standpoint, transfer fee covenants reduce the future value of a homeowner's property because of the economic burden that such covenants place on future sales.

I do hope you can find funding for your project.  The financial crisis and the housing market are definitely working against developers right now.  However, in my opinion transfer fee covenants are not appropriate for this type of project.  Even absent the legislation I do not believe that the transfer fees are enforceable against subsequent owners.  But, that has not yet been tested in the courts which is why states are passing legislative bans on private transfer fee covenants.

 
by Robert Franco | 2010/03/08 | log in or register to post a reply

Thank you

Hello Robert,

 

Thank you for your balanced view of Mr. Alderman and his sincere belief in these covenants as a viable and fair finance tool for developers and consumers. Those of us who support Freehold agree with him and of your assessment of his integrity. 

It does seem that the biggest concern regarding these covenants is the thought that some buyer would be unaware that they had purchased a property that contained the covenant.  As Mr. Alderman told you, that is a concern for every covenant that is placed on property. It is not hard to imagine that there are covenants that would effect the value of property far more then a 1% transfer fee at the time of a sale, yet they are not banned in fear that the buyer of the property will buy them unaware.  Instead the law is pretty clear that if a covenant is on file in the deed records there is constructive notice as a matter of law.  That is no excuse for actual notice to be sure, but that is cured through disclosure.

Disclosure through a proper title search and through proper disclosures of the covenants is the answer to this concern, not an outwrite ban that prevents people from the freedom to contract.

 
by Robert Wilson | 2010/03/09 | log in or register to post a reply

Freedom to contract?

As I said, I enjoyed meeting Mr. Alderman and my distaste for the Freehold covenant is nothing personal.  That said, I still believe that encumbering property in this manner is a poorly conceived idea.

I believe in the freedom to contract, but I don't think that is at issue here.  This is not an issue of contract because it involves people who were not a party to the contract.  This is an example of an owner encumbering the property for many years into the future with no contemporaneous benefit to the subsequent purchasers.  It reminds of the "dead hand controlling property from beyond the grave" that my property professor spoke of. 

If the developer and the person he sells the property to want to contract for a delayed payment due on sale, that would be fine.  But attempting to bind all subsequent owners for 99 years, where no privity of contract exists, is beyond the scope of a permissible contract.  This is why we have the touch and concern analysis.  Subsequent owners will only be bound if they receive a benefit from the encumbrance.  This is how the law protects them - by recognizing that they may be bound to perform the obligations of the covenant only if they are receiving the benefit of it. 

I believe that this concept is still recognized by the Restatement, though it doesn't use "touch and concern" per se, it does recognize that it is unconscionable to bind future owners if they are not receiving any contemporaneous benefit. 

You are correct to point out that other, more traditional CC&R's can affect the value of the property and they are binding even without actual notice.  However, the difference is that the land owner, or the property or community, is benefited by the covenant.  Thus, it is fair in the eyes of the law for the obligations to be binding on them. This seems to be an equitable way to differentiate covenants.

I'm still in favor of the outright ban, and I do not believe it interferes with the freedom to contract.  It just limits the scope of the persons who will be bound by its terms to the original contracting parties.

 
by Robert Franco | 2010/03/09 | log in or register to post a reply

2 Quick Points

Robert, in terms your "touch and concern" validity argument, how do you distinguish between a St.Joe transfer fee where the St. Joe Foundation non-profit owns the fee rights  - which is used in house sales in any St. Joe development in the nation, versus those in the Freehold context where the beneficiary is a profit enterprise.   Are you positing that the transfer fee covenants are not enforceable for Freehold (for profit beneficiary)  but are enforceable for St. Joe (non-profit beneficiary) ?

If I were to challenge the St. Joe Foundation from receiving a .5 transfer fee on my house sale the tile company would not close my house sale.  Your arugment cannot hold up unless you can distinguish why it is enforceble in one situation and not in the second.

Freehold is not the first to use private or non governmental transfer fees.  They have been used for years by St. Joe, Lennar, etc. and there has been no question as to their enforceability.  Freehold is the first to attempt to monetize them to provide liquidity for a real estate industry that badly needs funding.

My developments are not in Florida and not subject to Florida's ban.

 
by PETER JOHNSON | 2010/03/09 | log in or register to post a reply

Contract
Robert, Are you saying every individual contract is connected (no matter how far removed) to the initial contract made between the buyer of the first home in the subdivsion and the the seller? You keep referring to the subsequent sellers being tied to something they never agreed too. Aren't individual transactions a completely separate transaction and different factors come into play at each separate contract negotiation? If the buyer doesn't want to buy with the covenant attached, they have every right not to. Or they negotiate and work a deal. But you seem to be a very caring guy! 
by Paul Daniels | 2010/03/09 | log in or register to post a reply

Comments from the Boston Herald article on "Private Transfer Fees"
 

Sounds like derivatives to me; which is one of the things that broke the housing market bubble. Sounds like another Ponzi scam; get something for nothing; then get nothing but headaches and more fees for selling your house; just what every home seller and buyer needs!
 
 
So even if you pay cash for a house or you pay off your mortgage 100%, you can never really own your home free and clear? And if 50 years from now my heirs can't find the person to pay the 1% to, the house can't be sold becasue there is no clear title. Folks, anyone who buys a house with this deal is a moron, and any Realtor (tm) who trys to sell me a house with this covenant is losing my business.
 
 
If a developer cannot afford the up front investment funds needed to develop, then maybe he/she/they ought not be developing. Spare me any of the altrustic b.s. about it helping.
 
this is the biggest scam to hit the real estate market since....
 

 
You basically lower the value of your house by 1% off the top
 

 
The City of Boston, through the BRA, has a deal going in Charlestown with the same type of deal. It all sounds very shady.

 
Won't fly. This will reduce market demand further and agents will stay away from these properties.
 
 

Exactly. This is the most retarded idea since negative amortization loans.
 

 
The problem is real estate title covenants in the first place.

I guess it was inevitable that someone would think of this scam, once they thought about the concept of the title covenant long enough.

The bottom line should be that there is no such thing as conditional property. Property you possess conditionally isn't owned, it's leased. If this covenant is in place, the original builder or developer should still be the de jure owner of the property, responsible for taxes, liable for harms created on the property, etc.

There's a word for someone who realizes an ongoing revenue stream from a property: owner. This is an attempt to gain the benefit of being an owner without assuming the liabilities of ownership. It's a fraud being conducted in plain sight.

These transfer fees should be banned*, along with all other deed covenants like HOA's, etc. [*By "banned", I mean that deeds that include them should not be considered transfers, and the original owner of record should remain the owner. I don't think you should be able to "ban" any type of contract, but you can definitely define what standing you're going to give it before third parties, like the taxing authorities or courts.]
 
by John Roberts | 2010/03/10 | log in or register to post a reply

"Comments"
Google "Title Insurance- Scam, Lawsuits, Fleecing of America", etc. See what kind of comments you get. You surely don't believe some obscure, uneducated comments about a one sided article validates anything do you? If that was the case, the Title industry would have been long gone. 
by Paul Daniels | 2010/03/10 | log in or register to post a reply

St. Joe vs. Freehold covenants...

Replying to Peter's comment:

Robert, in terms your "touch and concern" validity argument, how do you distinguish between a St.Joe transfer fee where the St. Joe Foundation non-profit owns the fee rights  - which is used in house sales in any St. Joe development in the nation, versus those in the Freehold context where the beneficiary is a profit enterprise.

I am not familiar with the St. Joe covenants, however, if the transfer fee is purely a charitable donation with no contemporaneous benefit to the land, it could be challenged as a personal covenant, too.  Unless the state has some statute expressly permitting personal covenants to run with the land for charitable purposes.

However, the St. Joe covenants do not seem to be personal covenants.

St. Joe Community Foundation’s (STJCF) unique funding structure is based on payments from St. Joe that are a percentage of the proceeds from new sales in specific St. Joe communities developed by Arvida and RiverCamps. Payments continue each time the properties are resold through deed covenants, added by St. Joe at the initial sale, requiring a transfer fee to be paid to STJCF each time a property is subsequently sold. In this way, St. Joe, through Arvida and RiverCamps, and the property owners who live in our neighborhoods are partnering with the community for the betterment of the entire region. STJCF investments are based on building civic infrastructure and providing on-going improvements in the region through grants and initiatives that promote teaching and learning and create healthier communities.

The St. Joe transfer fees fund community projects that would qualify as a benefit to the burdened parcel.  Clearly, there is "on-going improvements" which touch and concern the land.

The Freehold covenant, on the other hand, doesn't fund any on-going improvements.  The transfer fees merely provide a "long-term income stream" for the developer or investors.  Even if Freehold donates a portion of the fee to charities, it would not be the same.  St. Joe's has a charitable purpose of improving the community and Freehold has a "for profit" purpose.  A small percentage of the fee paid to charity cannot save the whole transfer fee as a benefit to the property. 

It seems even St. Joe realized that the fee must touch and concern the land to be enforceable.

 
by Robert Franco | 2010/03/10 | log in or register to post a reply

Contract vs Covenants

Replying to Paul:

Robert, Are you saying every individual contract is connected (no matter how far removed) to the initial contract made between the buyer of the first home in the subdivsion and the the seller? You keep referring to the subsequent sellers being tied to something they never agreed too. Aren't individual transactions a completely separate transaction and different factors come into play at each separate contract negotiation? If the buyer doesn't want to buy with the covenant attached, they have every right not to. Or they negotiate and work a deal.

What I'm saying is that only the original developer and the first purchaser are in privity of contract.  They can agree in contract to any terms they like.  In order for future purchasers of the land to be bound by the terms of the covenant, the common law says that three conditions must be met:

  1. the intent of the parties as can be determined from the instruments of record;
  2. the covenant must be so closely connected with the real property that it touches and concerns the land; and,
  3. there must be privity of estate between the parties to the covenant.

The law of covenants realizes that privity of contract does not extend to subsequent owners, but will still impose the obligations of the covenant on them if these conditions are met.  The one at issue with the Freehold covenants is "touch and concern."  A covenant to pay sum of money is personal in nature, unless the money funds some ongoing benefit to the property or community, such as a homeowner's association.

It seems as though you are looking at each sale as a new contract between the buyer and the original covenantor.  However, I think it is a stretch to attempt to draw assent to the terms of the contract merely by the act of acquiring title with constructive notice of the covenant.  But, even if you could make that argument, suppose the buyer clearly adds language to the deed that says "grantee expressly does not assent to the terms of the covenant to pay a transfer fee to Freehold."  Now it is clear that the the buyer did not manifest an intent to contract with the covenantor.  You have to have mutual assent to a contract for it to be binding, but you don't need mutual assent for a covenant to run with the land - you only need the three criteria set forth above.

Perhaps, the fact that the argument can be made that taking title to property with a Freehold covenant of record is a manifestation of assent is a good reason to pass legislation with an outright ban on the covenants.  We all know that buyers do not read the CC&Rs when they buy property.  Any attempt to make this argument would be a legal fiction, and legislation is necessary to protect homeowners from these personal covenants to pay a sum of money for the benefit of people and investors they do not even know.

 
by Robert Franco | 2010/03/10 | log in or register to post a reply

Bank of America

I notice that B of A is suing First American for unpaid claims for $500 million. The title insurance companies have been doing this kind of thing for years and "short cutting" title searches.

This is why it is irritating for someone in this industry to claim some sort of "moral highground" on the basis that we are so worried about the consumer.

Robert, I am sure you are a fine fella (and probably have never done anything underhanded in this regard) but try and lay off the "scheme", etc. verbage. Freehold Capital is fighting for full disclosure/notification bills in all states to protect the consumer. If the disclosure document was not properly acknowledged and signed at time of eventual sale, the 1% is "null and void".

Some of the title companies are actually "stealing" from the consumer they supposedly care about. Unfortunately the Title lobby and Realtor lobby is ridiculously huge and have just "numbed" the public to pretty much believe anything they put out.

 

 

 
by Paul Daniels | 2010/03/17 | log in or register to post a reply

That isn't quite right...

First, I am aware of the Bank of America lawsuit and First American will not get any sympathy from me.  If you write some form of title insurance without a title search, you get what you deserve.  I am actually hoping that this will cost them dearly and the industry will start paying attention to marketable title standards.

Second, I asked Joe Alderman, from Freehold, about the effect of non-disclosure of the convenant.  If it is not dislcosed, the fee is NOT "null and void."  He said it would become a lien and would paid at the next sale.  In which case, the poor guy that bought the house will pay the previous transfer fee, his transfer fee, and most likely he will be forced to take a reduced sales price once it is discovered.  That is a "triple whammy" that we should be protecting homeowners from.

 
by Robert Franco | 2010/03/17 | log in or register to post a reply

food for thought

 

I read the posts on Source of Title from time to time found by filecraft.com SE and noticed the argument regarding the negative impact of private transfer fees on real estate. You mentioned that Maryland recently passed legislation that bans the use of these. I don’t have a subscription to SOT, but here’s a list of other states that have passed legislation banning PTFS: Florida, Iowa, Maryland, Missouri, Kansas and Utah. Texas and California have legislation limiting the use.
There are seven other states with legislation introduced or passed one house of their legislature that would ban PTFS: Alabama, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maryland, Ohio and Rhode Island. 17 states all told have looked at this issue. So it looks like legislators in several states are taking the stance that these are harmful to consumers.
 
by Hareton Green | 2010/11/15 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

Links

Recommended Blogs Recommended Posts Source of Title Services
Recent Comments

Alphabetic Roulette is truly a variance that switches the figures you are comfortable with finding i...
by addamsjohn844@gmail.com addamsjohn844@gmail.com
I am not independent, but I am a title abstractor for a small law firm in NC that deals with Real Es...
by Ashley Bonds
I've thought further of who will be affected by block chain and it won't just be lawyers, title sear...
by Carol Clark
I recently attempted to have a title company examiner sign and notarize (acknowledgement of her sign...
by DANDAN ZHU
 Thank you for the reminder to check for that notation about homestead exemption ending on the ...
by stephen willard
Pat was one of the sweetest men I've ever had the pleasure of knowing.  At every conference he ...
by Douglas Gallant
Pat was a good friend and a critical part of NALTEA.  So many memories from the NALTEA conferen...
by Jay Duncan
Pat was a good friend.  I have many wonderful memories, having known him. for 13 years,  ...
by Wanda Steudel
Categories

 
© 2007, Source of Title.