BILL ANALYSIS Ó AB 807 Page 1 Date of Hearing: May 5, 2015 ASSEMBLY COMMITTEE ON JUDICIARY Mark Stone, Chair AB 807 (Mark Stone) - As Amended April 8, 2015 PROPOSED CONSENT SUBJECT: REAL ESTATE TRANSFER FEES: RECORDED DOCUMENTS KEY ISSUE: SHOULD existing law be clarified to ensure that private transfer fees are always disclosed to prospective property buyers in a transparent and meaningful fashion, and that newly structured typeS OF TRANSFER fees do not circumvent current disclosure requirements? SYNOPSIS Private transfer fees (PTF) are generally imposed by a developer and require a homebuyer -- and any subsequent purchaser of a home -- to pay the fee every time a property is re-sold, in an amount typically based on a percentage of the sale price. The money generated by the PTF is sometimes used for environmental mitigation or development of affordable housing, but in other cases simply operates as a deferred profit for the developer or property owner who imposes the fee. In order to ensure transparency and proper notification of PTFs to prospective homebuyers, the Legislature passed and the Governor signed AB 980 (Ch. 689, Stats. 2007). Among other things, this law AB 807 Page 2 provides that when a PTF is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee must, as a condition of payment of the fee, concurrently record against the property a separate document entitled "Payment of Transfer Fee Required." This bill, sponsored by the California Association of Realtors, seeks to further the intent of AB 980 and ensure that all PTFs on real property continue to be recorded with the county and disclosed to prospective purchasers in a transparent manner. According to the author, this bill is needed to ensure continued notification and disclosure of PTFs to homebuyers because some PTFs are being structured differently since AB 980 became law in 2007. For example, these new types of PTFs may be structured so that they are not necessarily based on the sale price of the home or paid immediately upon transfer of the home, as was contemplated by AB 980. As a result, there may not be appropriate disclosure of all PTFs, contrary to the intent of existing law. To nip this potential problem in the bud, this bill does the following: (1) clarifies the definition of PTF to capture any fee that must be paid "as the result of" the transfer of the property; (2) clarifies that the method of calculating the amount of the PTF is disclosed if the fee is neither a flat fee, nor a percentage of the sales price; and (3) clarifies that required disclosures about the PTF must appear in a single document and cannot be incorporated by reference into other documents. The bill provides that these changes are clarifying and declaratory of existing law. The bill is also supported by the Community Associations Institute and has no known opposition. SUMMARY: Clarifies existing law to ensure that all private transfer fees on real property are disclosed to prospective purchasers. Specifically, this bill: 1)Clarifies that "transfer fee" means any fee payment AB 807 Page 3 requirement imposed within a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of, or any interest in, real property that requires a fee be paid as a result of transfer of the real property. 2)Provides that the following information, required to be recorded under existing law, shall be set forth in a single document and may not be incorporated by reference from any other document: a) Payment of a transfer fee is required. b) The amount or method of calculation of the fee. c) The date or circumstances under which the transfer fee payment requirement expires, if any. d) The entity to which the fee will be paid. e) The general purposes for which the fee will be used. 3)Finds and declares that changes made by this bill are clarifying and declaratory of existing law. EXISTING LAW: 1)Defines "transfer fee" to mean any fee payment requirement imposed within a covenant, restriction, or condition contained in any deed, contract, security instrument, or other document affecting the transfer or sale of, or any interest in, real property that requires a fee be paid upon transfer of the real property. (Civil Code Section 1098(a). All further references are to this code unless otherwise stated.) AB 807 Page 4 2)Specifies several categories of fees that are not included in the above definition of a transfer fee, including, among others: a) Fees or taxes imposed by a governmental entity. b) Fees pursuant to mechanics' liens. c) Fees pursuant to court-ordered transfers, payments, or judgments. d) Fees pursuant to property agreements in connection with a legal separation or dissolution of marriage. (Section 1098.) 3)Also excludes from the definition of "transfer fee" any fee reflected in a document recorded against the property on or before December 31, 2007, that is separate from any covenants, conditions, and restrictions, and that substantially complies with subdivision (a) of Section 1098.5 by providing a prospective transferee notice of the following: a) Payment of a transfer fee is required. b) The amount or method of calculation of the fee. c) The date or circumstances under which the transfer fee payment requirement expires, if any. d) The entity to which the fee will be paid. AB 807 Page 5 e) The general purposes for which the fee will be used. (Section 1098(i).) 4)Provides that when a transfer fee, as defined, is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, shall concurrently record against the property a separate document entitled "Payment of Transfer Fee Required" in at least 14 point bold face type that includes all of the following: a) The names of all current owners of the property subject to the transfer fee, a legal description and assessor's parcel number of the property. b) The amount, if the fee is a flat amount, or the percentage of the sale price constituting the fee. c) For residential property, actual dollar-cost examples of the fee for specified prices. d) Date or circumstance under which the transfer fee payment requirement expires. e) Purpose for which the funds will be used. f) Entity which will receive funds from the fee, including contract information. g) The signature of the authorized representative of the entity receiving the funds. (Section 1098.5(b).) 5)Provides that if a property being transferred on or after January 1, 2008 is subject to a transfer fee, the transferor AB 807 Page 6 must provide, at the same time as the transfer disclosure statement required pursuant to Section 1102.6 is provided, an additional disclosure statement containing all of the following: a) Notice that payment of a transfer fee is required upon transfer of the property. b) The amount of the fee required for the asking price of the real property and a description of how the fee is calculated. c) Notice that the final amount of the fee may be different if the fee is based upon a percentage of the final sale price. d) The entity to which funds from the fee will be paid. e) The purposes for which funds from the fee will be used. f) The date or circumstances under which the obligation to pay the transfer fee expires, if any. (Section 1102.6(e).) FISCAL EFFECT: As currently in print this bill is keyed non-fiscal. COMMENTS: This bill, sponsored by the California Association of Realtors (CAR), seeks to ensure that all private transfer fees on real property are recorded with the county and disclosed to prospective purchasers in a transparent manner, consistent with the intent of existing law, AB 980, enacted in 2007. To further the intent of this current law, this bill clarifies the following: (1) the definition of PTF to capture any fee that AB 807 Page 7 must be paid "as the result of" the transfer of the property; (2) the method of calculating the PTF if the fee is neither a flat fee, nor a percentage of the sales price; and (3) required disclosures about the PTF must appear in a single document and cannot be incorporated by reference into other documents. Background on Private Transfer Fees. Existing law allows various required fees to be included in the price of a residential real estate transfer. These include public fees such as transfer taxes and document recording fees as well as private fees, such as homeowner association processing fees. All of these required fees and payments must be disclosed on statutorily required forms. In addition, various types of voluntary fees, including escrow fees, title insurance premiums, and realtor commissions, as well as liens, including mechanics' liens, judgment liens, and lender liens, are all paid out of escrow. Private transfer fees (PTF) are generally imposed by the developer and require the homebuyer -- and any subsequent purchaser of the home -- to pay a fee upon transfer based on some percentage of the sale price. The money generated by the imposition of the PTF is sometimes used for environmental mitigation or development of affordable housing, but in other cases may simply operate as a deferred profit for the developer or property owner imposing the fee. While PTFs are not prohibited by law, in practice their use has been tempered in recent years because under Federal Housing Finance Agency regulations (12 CFR Part 1228) promulgated in 2012, Freddie Mac and Fannie Mae backed mortgages must require any funds generated by a PTF to provide a direct benefit to the encumbered property. According to the sponsor, some of the first private transfer fees appeared in Roseville over ten years ago when a project developer and the city agreed to a legal settlement with AB 807 Page 8 environmentalists allowing for the development of 8,400 new homes on the city's last large expanse of vacant land while preserving nearly 6,000 acres of open space. The $85 million needed to purchase the agreed-upon open space results from a charge of a percentage of the sales price each time a home within the development is sold over the next 20 years. The fee goes to the private, non-profit Placer Land Trust for the purchase of the open space, and these fees are required as part of the covenants (CC&Rs) recorded against the property. In order to ensure transparency and proper notification of PTFs to prospective homebuyers, the Legislature passed and the Governor signed AB 980 (Ch. 689, Stats. 2007). This law provides that when a PTF is imposed on real property on or after January 1, 2008, the person or entity imposing the transfer fee, as a condition of payment of the fee, shall concurrently record against the property a separate document entitled "Payment of Transfer Fee Required." This document must state, among other things, the following information: (1) The amount, if the fee is a flat amount, or the percentage of the home price constituting the amount of the fee; (2) Actual dollar-examples of the amount of the fee based on various home prices; (3) The date or circumstances under which the obligation to pay the fee will expire; and (4) the purposes for which the funds from the fee will be used. Need for the bill. According to the author: AB 807 is needed to ensure continued notification and disclosure of PTFs to homebuyers because some PTFs are now being structured very differently than previously seen since AB 980 became law in 2007. For example, these new types of PTFs may be structured so that they are not necessarily based on the sale price of the home or paid immediately upon transfer of the home, as was contemplated by AB 980. AB 807 Page 9 As a result, prospective homebuyers may not be made aware of such fees, contrary to the intent of existing law, if these new types of PTFs are ever determined by the courts to fall outside the current statute requiring recordation and disclosure. Recent court cases have documented various efforts to structure PTFs to avoid the recordation requirements of AB 980; therefore, elements of the current statute should be clarified to further the Legislature's intent to protect homebuyers. A recent court case illustrates the author's contention that existing law needs to be clarified to ensure that all private transfer fees are recorded and disclosed to prospective homebuyers. In Marina Pacific Homeowners Association v. Southern California Financial Corporation (2014), defendants imposed an "assignment fee" due every month in an amount based on a complicated formula that included the fair market value of the property and the monthly land rent. In ruling for the plaintiff homeowner's association, both the trial and appellate courts agreed that the fee at issue was a private transfer fee under the meaning of Section 1098. However, the case demonstrates that payment of a PTF: (1) did not have to occur upon transfer of the property, but could be required a number of years after the property had been transferred; and (2) did not have to be based on the sale price of the property, but could be in any amount or calculated by any other method. (It should be noted that in March 2015, the CA Supreme Court declined to review the case, letting the Court of Appeals decision stand and effectively ending the litigation.) Although the fee in Marina Pacific was recognized as a PTF, the case illustrates that if these newly structured types of PTFs are ever determined by other courts to fall outside the current statute, disclosure to prospective homebuyers is not necessarily assured. AB 807 Page 10 Clarification of definition of PTF to mean a fee paid "as a result of transfer." Accordingly, the bill seeks to clarify the definition of PTF to ensure that prospective home purchasers receive required disclosures even if a new type of PTF were to require payment some period of time after transfer of the home, rather than "upon transfer." Under existing law, private transfer fee means "any fee payment requirement . . . that requires a fee be paid upon transfer of the real property" (italics added.) The bill would clarify this definition by specifying that a PTF means "any fee payment requirement . . . that requires a fee be paid as a result of transfer of the real property"-the essence of a transfer fee. The Committee's review of the legislative history around the current definition of PTFs indicates that this simple clarification reflects the original intent of AB 980-to require disclosure for fees that were required to be paid as a result of or upon the event of the property being transferred. There is no evidence from the record that the Legislature ever intended to exclude fees that would otherwise meet the definition of PTF simply because payment was structured to occur after some indefinite period of time after transfer, rather than immediately upon transfer of the property. For this reason, the bill also specifies that this amendment is clarifying and declaratory of existing law (as enacted by AB 980 of 2007.) Clarification that the fee may not be a percentage of the sales price. Under existing law, among the items of information that must be recorded and disclosed to the purchaser is the amount of the PTF, if the fee is a flat amount, or "the percentage of the sales price constituting the cost of the fee." (Section 1098.5(a)(2)(B).) In order to ensure disclosure of the amount of the PTF if the fee represents neither of those two figures, the bill clarifies that the method of calculating the amount may be disclosed instead, and makes corresponding changes to the AB 807 Page 11 disclosure notices. Clarification of the form of the disclosure to require a single document and not by reference to other documents. According to the author, prospective homebuyers may not be made aware of PTFs when required disclosures are made only by reference to one or more secondary documents that contain the relevant information, instead of being consolidated and recorded in a separate individual document, as was the intent of AB 980. According to the Senate Judiciary Committee analysis of AB 980 (July 10, 2007): The California Association of Realtors, sponsor, further notes: "Regrettably, transfer fee payment requirements are often not well disclosed to prospective homebuyers . . . As a result, C.A.R. is sponsoring AB 980 to require that a separate document be recorded that discloses the transfer fee payment obligation. Recordation of a separate document will insure that the transfer fee payment requirement is brought to the attention of prospective homebuyers." The legislative record shows that the intent of AB 980 was to ensure disclosure of key PTF information to prospective transferees was accomplished up front and not buried in other documents. The bill sought to do this by requiring "a separate document" to be recorded concurrently with the instrument creating the transfer fee requirement. (Section 1098.5, subd. (a) and (b).) In addition, for property being transferred on or after January 1, 2008, AB 980 required the transferor to provide the transferee with an "additional disclosure statement" containing the PTF information at the same time as the more general transfer disclosure statement required under Section 1102.6 (also known as the "TDS.") AB 807 Page 12 Accordingly, this bill seeks to clarify that specified PTF information must be set forth in a single document and not incorporated by reference from any other document. The bill also clarifies that the additional disclosure notice, required under Section 1102.6e, must be provided to the transferee at the same time as the TDS, and only if that information has not already been provided pursuant to this single document. Lastly, the bill finds and declares that these amendments are clarifying and declaratory of existing law, especially in light of the legislative history showing that the intent of AB 980 was a "separate document" to ensure disclosure of a PTF and its parameters. Previous related legislation. AB 980 (Calderon), Ch. 689, Stats. 2007, established the current definition of private transfer fees, and required recordation and specified disclosure statements of the PTF to be provided to prospective transferees of property. AB 1574 (Houston) of 2007 would have imposed greater restrictions on the use of PTFs, including capping the amount of the fee at 2% of the sale price of the property. This bill was amended in the Senate to address an unrelated subject. SB 670 (Correa) of 2007 would have prohibited PTFs altogether, but the bill failed in the Senate Transportation and Housing Committee. REGISTERED SUPPORT / OPPOSITION: AB 807 Page 13 Support California Association of Realtors (sponsor) Community Associations Institute Opposition None on file Analysis Prepared by:Anthony Lew / JUD. / (916) 319-2334