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Freehold Capital Partners Still Trying to Securitize Private Transfer Fees
by Robert Franco | 2010/08/01 |

Undeterred by the several states that have banned the use of private transfer fees, Freehold is apparently still trying to find a way to securitize them.  The Wall Street Journal has reported that Freehold has approached several Wall Street banks to develop the securities, but has not yet struck a deal.

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Currently, 15 states have passed bans on private transfer fees.  Only one state, California, has passed legislation that only requires disclosure of the fees.  Six other states have legislation pending and seven more are expected to introduce legislation in 2011.  That could mean that private transfer fess could be banned in as many as 28 states in the next year or so.  One has to wonder what will be left to securitize?

The legislation has to make it difficult to find a bank that would be willing to securitize private transfer fees.  In addition to the states that have completely banned them through legislation, there is also the small problem that even absent legislation they would not be enforceable under the common law.

I have blogged about their doubtful enforcement in the past, and two recently published articles support my position.  The American Bar Association's Probate & Property this month contained an article by R. Wilson Freyermuth - Putting the Brakes on Private Transfer Fee Covenants.  Freyermuth is the John D. Lawson Professor of Law and a Curator's Teaching Professor at the University of Missouri School of Law.  In the article, Freyermuth says that "courts should refuse to enforce private transfer fee covenants against successors."

A private transfer fee covenant is payable only to private persons, not to an owner's association.  By the time the developer collects a future transfer fee, the developer likely will have completed the sale of all affected lots and will have no legal interest (other than the transfer fee rights) in the community.  As a result, the benefit of a private transfer fee covenant is personal to the developer; in the language of the common law, the benefit of the covenant is "in gross."  Under the weight of common law authority, if the benefit of a covenant is in gross, the burden of that covenant does not run to bind successors to the original covenantor.

Freyermuth also analyzed the private transfer fee covenants under the Restatement of Servitudes approach and, for several reasons, found that should be similarly unenforceable. 

In Private Transfer Fees: More than you bargained for, Judon Fambrough and Harold D. Hunt analyzed the current state of the law in Texas.  Fambrough is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University, and Hunt is a research economist with the Real Estate Center.  The article points out that "under Texas case law, a covenant running with the land must meet four requirements.  The covenant must:

  • touch and concern the land,
  • relate to a thing in existence or specifically bind the parties and their assigns,
  • be intended to run with the land by the original parties who placed the covenant on the land, and
  • require notice of the covenant be given to the successors to the burden (subsequent owners)."

But the most interesting thing about the Fambrough/Hunt article was that they discussed the Texas law that bans private transfer fees.  Freehold has contended that their covenant is legal because the law only prohibits the buyer from paying the fee - their covenant requires the seller to pay it.  However, as I have said before, this is incorrect.  Fambrough and Hunt write:

Currently, the statewide rule mandates that "...a transfer fee that requires a transferee (a buyer) of residential real property or the transferee's heirs, successors, or assigns to pay a declarant or other person... a fee in connection with a future transfer of the property is prohibited."


The statutory language prohibits the transferee, his or her heirs, successors or assigns from paying the fee. Taken literally, this language prohibits anyone who takes the property from the immediate buyer, such as the buyer’s heirs, successors or assigns, from ever having to pay the fee.

Legally speaking, to assign means to transfer. An assignee is someone who receives property from another. So anyone purchasing the property from the present owner is an assign (or assignee) and is prohibited by law from paying the transferee fee.

The ABA article also said that Freehold's argument was "of doubtful validity," calling it "inconsistent with a literal reading of the statute." 

I hope this lays to rest the argument that Texas did not ban private transfer fees, at least with respect to residential real estate.  Clearly, a private transfer fee covenant on residential property is Texas is not enforceable against subsequent owners.

Freehold and its proponents have long been arguing that states have been passing legislation at the insistence of lobby groups for the NAR and ALTA, who they claim are only interested in protecting their members' profits at the expense of home buyers and developers.  However, the American Bar Association and the Real Estate Center at Texas A&M University cannot be said to be beholden to these special interest groups. 

It is no surprise that Freehold can't find a bank willing to securitize private transfer fees - what would happen when the investors realized that the securities they bought are worthless because the covenant cannot be enforced against subsequent owners? 

And things could get even worse for Freehold.  According to the Wall Street Journal article, Home-Resale Fees Under Attack:

A coalition of real-estate industry groups is asking the government to ban a new type of fee on property transactions they say unfairly strips equity from property owners, including homeowners, and redistributes the funds to developers.

The group, led by the National Association of Realtors and the American Land Title Association, has asked U.S. Treasury Secretary Timothy Geithner to use the consumer-protection agency created by the recent financial-reform legislation to outlaw "capital recovery fees."

Last week ALTA sent a letter to Edward DeMarco, Federal Housing Finance Agency's Acting Director, asking that he prohibit private transfer fees on conventional mortgages.  Thursday DeMarco said, "I remain very troubled by what the agency is learning about private transfer fees. We continue to investigate the implications for [Fannie and Freddie] and the housing finance system."

If Fannie and Freddie refuse to buy mortgages encumbering property subject to private transfer fee covenants, developers would have a very difficult time selling homes if they should choose to burden the subdivision with such a covenant.  If people can't finance them, they aren't going to sell.

It would seem the market is drying up for Freehold. But you wouldn't get that impression from Freehold.  According to the Wall Street Journal article, "the company claims it so far has about $600 billion in real estate subject to the fees."  Yes - that is $600 BILLION! 

That number seems just a tad on the high-side to me.  Since Freehold won't identify its clients, it is hard to verify.  But the National Association of Home Builders has estimated the new-home market to be worth $94.5 billion in 2010. 

A Wall Street Journal article earlier this month, New York Firm's Property Transfer Fee Plan Stirs Controversy, reported that Freehold "hired the high-profile law firm Venable LLP in December 2009 to lobby for federal stimulus dollars to finance the securitization."  Fortunately, that didn't seem to get much traction. 

Transfer fees aren't addressed in the sprawling financial regulatory bill that is pending in Congress, but the Freehold plan is running into resistance in Washington. Rep. Brad Sherman (D., Calif.) called it a "new predatory financial scheme" at a congressional hearing last month.

I don't think there is much to worry about with private transfer fees.  It seems very unlikely that Freehold will be able to securitize them.  First, there is considerable doubt that they are even enforceable; so who would be willing to buy investments secured by them?  Second, states are banning them at a pretty quick pace to remove any doubt about their enforceability.  And, third, they are just extremely unpopular.  I think MoneyTalksNews summed it up best in The Mother of Outrageous Fees?

Fee to use another bank’s ATM? $2. Fee to check a bag when you fly? $35. Fee to the guy who built your house 50 years ago when you decide to sell? Outrageous.

Yup... Outrageous

Robert A. Franco


Categories: Attorneys, Banking & Finance, Consumer Advocacy, General Interest, Legislation, Title Problems

2046 words | 9604 views | 9 comments | log in or register to post a comment

California is Insane

  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.

by William Pattison | 2010/08/02 | log in or register to post a reply

Freehold System - Just Require Notice and let the Free Market decide

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. 

by PETER JOHNSON | 2010/08/02 | log in or register to post a reply

Fair enough...

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.


by Robert Franco | 2010/08/02 | log in or register to post a reply

Creative Thinking - How to Engineer a Transfer Fee


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.


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'"!

by Wyatt Bell | 2010/08/04 | log in or register to post a reply

Freehold responds...

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). 

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. The CRE sector needs a solution that does not involve "extend and pretend", "delay and pray" or whatever else you want to call it. It needs a balance sheet solution, an injection of liquidity, and the ability to spread costs and negative equity out over time, and a capital recovery fee accomplishes that objective.

 Nothing herein shall be construed as legal advice.

by J.B. Alderman | 2010/08/04 | log in or register to post a reply

Financial Gimmickry

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"!! 

by Wyatt Bell | 2010/08/04 | log in or register to post a reply

I'd ask for my money back...

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. 

by Robert Franco | 2010/08/05 | log in or register to post a reply

A flawed assumption leads to a flawed conclusion...
Wyatt- The fee is not perpetual. It runs for 99 years. As such, your argument was built entirely upon a flawed assumption. In fact, I would agree with you 100% that a perpetual fee would be unconscionable. If you consider the number of times a home sells in 99 years, a Capital Recovery Fee bears a very reasonable relation to the development costs for which the fee is assessed. I realize the title industry wants to demonize the fee, but the proposition is simple, As a home buyer, how do want to pay for development costs? Option 1: Have the developer assess 100% of the costs to you. You then include this amount in your mortgage, pay interest on the entire amount, and pass the costs along to the next buyer. Option 2: Pay less up front, in return for paying a fee of 1% when you sell. Let appreciation add value, and let the savings come from lower interest payments, lower transaction costs, etc. In other words, pay for the period of time you use the property. Some buyers will prefer Option 1, and others will prefer Option 2. The vast majority of homes have no fee, so there are plenty of options under Option 1. In addition, since the fee runs for 99 years, and then expires, the pool of properties in Option 1 will always be greater than the pool of properties under Option 2. If buyers decide they unanimously prefer Option 1, developers will not use Option 2. The issue is not whether or not development costs have to be paid. The issue is how to pay the costs, and whether or not we will allow consumers a choice. 
by J.B. Alderman | 2010/08/18 | log in or register to post a reply

Unnecessary Evil

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.

by Aaron Hill | 2010/08/25 | 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



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