What Are "Transfer Fees"? |
What's All the Hubbub?
By Beth A. Grimm, Attorney (November 2003)
here is much "to do" in this State of California about "transfer fees". There are groups of people pressuring the legislators in California to ban collection of fees related transfer of membership in common interest developments. The ultimate questions are: (1) what is "reasonable" and (2) who should be reasonable for paying these fees - the Association (all owners) or the owners responsible for the fees? It is obvious that someone has to pay for the services involved in providing records that are required in a real estate transfer of a common interest development (CID) property. Should it be the Seller? The Buyer? Or the Association (all of the owners in the CID collectively)?
And who decides what is "reasonable"? Is it what the market will bear? What about a "nonprofit" (like an HOA)? Should the legislature try to curtail what a "for profit company" (management) can charge that provides services for the "nonprofit entity (like an Association)?"
Are the advocates for homeowner associations that fight to prevent limitations on transfer fees fighting for or against the owners? And one more: may the legislators of California control what management companies charge to perform all of the necessary services in a CID transfer, or would that be a constitutional violation (unreasonable restraint on the right to contract)?
These are interesting questions. And illustrative of the controversy in this state with regard to recovery of the costs for the transfer of CID property.
What are they in this context? They are the fees charged in common interest developments, usually to Sellers of property, and the purpose of these fees is to cover the costs of providing all of the documents that are required to be provided under Civil Code Section 1368, and the costs of changing the membership records. Sometimes they include costs of issuance of parking permits, mailbox keys, pool keys, gate passes and other items like that. They often are intended to cover extras like phone calls and completion of lender certification forms, and other items required by escrow companies and lenders. They might cover review of the property file to see if there are any outstanding violations that need to be noted. Sometimes, though, they are imposed to support a special entity that serves a common interest development, often called a Community Services Organization. That might be a golf course, a coastal wetlands area, a recreational facility, or an environmental protected area; something that can be enjoyed by the nearby residents, but that needs funds to operate.
Two years ago, the California Association of Realtors (CAR) proposed legislation that would limit transfer fees for community services organizations (AB1086) and the statute was signed into law last year. It became effective on January 1, 2004. CAR seems to be the group that has the most criticism of "transfer fees". Realtors claim they can make or break a sale, especially when they are $3000-$5000. Most community association transfer fees range from $50-$500, but when there is a special entity like a community services organization involved, the higher amounts may be required.
Certainly, there are some justifiable reasons for questioning some of the transfer fees that are charged in the State of California. In fact, it is entirely possible that some of the homeowners associations or managers in California may be charging exorbitant fees when membership transfers. But many use these fees to reimburse costs that the Association (hence, all owners) would otherwise have to bear. Some entities that count on these transfer fees to pay for amenities and benefits of nearby facilities, environmental areas, or wetlands, claim that to the extent these fees are covered by the purchase and sale of CID properties, the association will not have to inflate the regular and special assessments that are paid by all of the owners to support these entities. Some rationalize that the people who sell property benefit from the appreciation sellers of real estate in California tend to realize, and wonder why others should bear the burden of the transfer costs.
There was a challenge to a "transfer fee" in Southern California. Apparently, a group tried to start a class action but a class was never certified and the dispute was settled (with significant legal costs involved). I am told the dispute was over a $60 transfer fee. I do not know the details, but am aware that complaints do arise over what seems to me to be the most insignificant of fees (given the work involved). Some managers and attorneys have contacted me to see whether I believe the new law prohibits all transfer fees. I do not. I am told that realtors are widely publicizing what they tout as a victory (the signing of AB 1086 into law) and headlines are being misconstrued. A publication that says "Transfer fees are banned in community service organizations," (as I am told one read) does not mean they are banned in HOAs. And the new law exempts some CSOs from the new restrictions. It is true that transfer fees are now limited in CSOs, and there are limitations placed on homeowner associations too - but the truth is, the limitations for homeowner associations are not new.
WHAT DOES THE NEW LAW PROVIDE?
The bill was Chaptered as 393; it amends Civil Code Section 1368 which sets forth the obligations of a seller in a common interest development to provide information to the buyer. The Seller can ask the Association to provide the information in Civil Code Section 1368 and the Association has to comply within 10 days. Changes made by AB 1086 include the following:
1. Neither an association nor a community service organization or similar entity may impose or collect any assessment, penalty, or fee in connection with a transfer of title or any other interest except for the Association's "actual costs to change its records" and the Association's "reasonable costs to prepare and reproduce" items requested by an owner in conjunction with Civil Code Section 1368 disclosure requirements. Neither of these provisions changes what an association can charge; the new language describes what CSOs are exempt and which are not, and which are "grandfathered" or "exempt" because of the non-retroactivity of the bill.
WHAT ORGANIZATIONS ARE LIMITED THAT WERE NOT MENTIONED BEFORE?
If the CSO or similar entity was established prior to February 20, 2003, and it exists in whole or in part to fund or perform environmental mitigation or to restore or maintain wetlands or native habitat, as required by the state or local government as an expressed written condition of the development, it is exempt.
The other CSOs that are exempt from the transfer fee, assessment and penalty limitations are those that, to the extent not described above, that were established and received a transfer fee prior to January 1, 2004; and on or after January 1, 2006, the CSO or similar entity offers the purchaser certain payment options for the fee or charge it collects at the time of transfer, which includes paying the fee at the time of transfer, or paying it pursuant to installment payment plan of a period not less than seven years. If the purchaser elects to pay the fee or installment over time, the CSO or similar entity may collect additional amounts that do not exceed the actual cost for billing and financing of the amount owed. If the purchaser sells the separate interest before the end of the installment payment plan, he or she shall pay the remaining balance prior to the transfer. This allows the purchaser to avoid the entire "hit" at the outset.
I believe it is interesting to note that the burden has shifted. I believe it generally to be the case in the past that the seller was the most likely party responsible to pay the fee out of the proceeds of sale. Now, pursuant to the new Civil Code Section 1368, the focus seems to have shifted to the purchaser when a CSO with a substantial transfer fee is involved. Is this a good thing? I don't have all the answers, but the questions are continuing.
WHAT IS A COMMUNITY SERVICE ORGANIZATION?
The statute defines CSO or similar entity to mean "a non-profit entity, other than an association, that is organized to provide services to residents of the common interest development or the public in addition to the residents, to the extent the community common areas or facilities are available to the public".
These entities do not include an entity that "has been organized solely to raise money and contribute to other non-profit organizations that are tax exempt and that provide housing or housing assistance."
WHAT HAPPENS IF AN ASSOCIATION OR CSO THAT IS NOT EXEMPT VIOLATES THE LIMITATIONS STATED IN THE STATUTE?
As has been the case previously, violation of these transfer fee requirements can result in a $500 civil penalty, and A "violator" could end up having to pay the other side's attorney's fees if the other side prevails in a legal action (including small claims court).
THE LAW OF AGENCY - WHAT DOES THIS MEAN?
This new bill also defines a person who acts as a community association manager as an agent, as defined in Civil Code Section 2297, of the association. It means the manager is an agent for purposes of collecting these fees. However, some argue that it also means that the management company can collect no more than the Association can collect under the statute, being limited through the agency relationship.
Management companies have choices. They can refrain from charging any amounts that exceed what the statute allows, or they can, through their agreements or contracts for compensation negotiate extra pay as part of the cost of doing business (this relieves the owner from paying the full amount). An agent is entitled essentially to do the same acts the principal can do, but can also be limited by the limitations imposed on the principal (here, the Association). The real question is if the agent gets sued for a transfer fee (on a claim that it is unreasonable) and loses, who pays the attorneys fees and/or penalty? I would venture a guess: in many situations, managers are protected through their contracts with "indemnification clauses" that in essence make the Association for the acts of the manager. However, if a manager knowingly violates the law, the indemnification clause may not provide the protection or insulation that is assumed. So beware - pay attention to the limitations, and create a "paper trail" that validates the charges that are made upon transfer of a property or a refinance situation.
HOW DO YOU DO THAT?
It is helpful to document what types of services are being provided in a standard sales or refinance transaction and reflect the names and amounts for those services according to the average time and/or cost involved. It is helpful to get away from the label "transfer fee" and use alternate terminology. And in speaking with colleagues in the industry, it appears also to be critically important for the Association Board members to understand exactly what fee is being charged, how it is characterized, and whether it is reasonably geared to cover the costs, rather than provide a profit to the Association. Herein lies a great dichotomy:
Management companies are often involved and often provide the service. Management companies are in the business for profit (that is how the principals get paid - without it, they do not get paid). Therefore, in setting transfer fees, or assessing any costs, there has to be a profit margin involved. The industry standard probably rests somewhere around 10% (as that is what contractors often indicate in their proposals to do work). This makes perfect sense. Without the benefit of good management firms, the work simply might not get done. There is no incentive to do work without pay.
The Associations, on the other hand, must plan for zero-based budgeting and are expected NOT to make a profit for any of the services offered. But Boards are not generally equipped to do the work involved in storing and preparing records, filling out the necessary papers, and transferring records information. Who reasonably expects volunteers to get involved at this level? So trying to reconcile the two is very difficult. Managers should not be strapped by limitations on the Association. But should sellers pay charges that are justified by good business judgment, or should those costs be addressed in the Association budget as a cost of doing business?
For a long time, many in the community associations industry have opined that what the management company charged for transfer fees was a justifiable charge and did not violate the statute because it in fact constitutes an "actual cost" to the association, and "actual cost" satisfies the statutory language. Things may change as the world turns. "Transfer fee" has become a dirty word.
WOULD IT HELP TO KNOW WHAT IS REALLY INVOLVED IN A TRANSFER OF PROPERTY RECORDS DUE TO A SALE OR CHANGES DUE TO A REFINANCE?
The amount of service that goes into transfer of membership can be quite simple, or quite voluminous. Sizable transfer fees may be justified in some cases. Many of the services demanded by the realtors, lenders and title companies do not relate in any way to the CC 1368 requirements, but require "extra" services like determining occupancy ratios, answering lender certifications and questions, special services related to reporting on litigation, etc., There is no limitation that applies to non CC 1368 services. And since these extra services often differ considerably in the amount of work and followup involved, there is no way to put a realistic or reasonable cap on them, except to require that they be "reasonable" and let the market (or court commissioner or judge) decide.
And from the realtors' perspective, I think it is fair to compare a mortgage fee disclosure statement to transfer fees generally charged. Mortgage transfer and close of escrow involves some of the same duties and responsibilities and collection of paperwork can be similar in many regards for both processes. However, in comparison of mortgage and closing costs generally range somewhere between $2,000 and $7,000 and common transfer fees generally range from $50 to $200. A common complaint that realtors make that transfer fees may "make or break" a sale seems incongruous to me.
WHAT DOES CIVIL CODE SECTION 1368 ACTUALLY REQUIRE?
It might help to know all of the items that have to be pulled together under Civil Code Section 1368. Remember, the seller in a CID has to provide these items but he or she can ask the Association to provide them instead, and for this service, has to pay a fee.
The items are:
(1) A copy of the governing documents of the common interest development, including any operating rules, and including a copy of the association's articles of incorporation, or, if not incorporated, a statement in writing from an authorized representative of the association that the association is not incorporated.
(2) If there is a restriction in the governing documents limiting the occupancy, residency, or use of a separate interest on the basis of age in a manner different from that provided in Section 51.3, a statement that the restriction is only enforceable to the extent permitted by Section 51.3 and a statement specifying the applicable provisions of Section 51.3.
(3) A copy of the most recent documents distributed pursuant to Section 1365.
(4) A true statement in writing obtained from an authorized representative of the association as to the amount of the association's current regular and special assessments and fees, any assessments levied upon the owner's interest in the common interest development that are unpaid on the date of the statement, and any monetary fines or penalties levied upon the owner's interest and unpaid on the date of the statement. The statement obtained from an authorized representative shall also include true information on late charges, interest, and costs of collection which, as of the date of the statement, are or may be made a lien upon the owner's interest in a common interest development pursuant to Section 1367 or 1367.1.
(5) A copy or a summary of any notice previously sent to the owner pursuant to subdivision (h) of Section 1363 that sets forth any alleged violation of the governing documents that remains unresolved at the time of the request. The notice shall not be deemed a waiver of the association's right to enforce the governing documents against the owner or the prospective purchaser of the separate interest with respect to any violation. This paragraph shall not be construed to require an association to inspect an owner's separate interest.
(6) A copy of the preliminary list of defects provided to each member of the association pursuant to Section 1375, unless the association and the builder subsequently enter into a settlement agreement or otherwise resolve the matter and the association complies with Section 1375.1. Disclosure of the preliminary list of defects pursuant to this paragraph does not waive any privilege attached to the document. The preliminary list of defects shall also include a statement that a final determination as to whether the list of defects is accurate and complete has not been made.
(7) A copy of the latest information provided for in Section 1375.1.
(8) Any change in the association's current regular and special assessments and fees which have been approved by the association's board of directors, but have not become due and payable as of the date disclosure is provided pursuant to this subdivision.
These are a lot of items to provide. And the timeframe for providing these materials is limited. The statute says: "Upon written request, an association shall, within 10 days of the mailing or delivery of the request, provide the owner of a separate interest with a copy of the requested items specified in paragraphs (1) to (8), inclusive..."
These are not the only items that are commonly requested these days. An escrow demand often consists of additional requests for things like:
(1) Minutes of the meetings of the Association and Board for the last 12 (or sometimes 24) months.
(2) A [non-standardized] lender certification questionnaire that ranges from 5 or 6 questions to 3 or 4 pages.
(3) Response to telephonic requests, on demand.
(4) The right to attend an association meeting.
(5) Information about insurance carried by the Association.
(6) Information about litigation, if there is any pending.
None of these items (1)-(6) is part of CC 1368. These items, save number (1), all carry legal ramifications, and therefore, the manager or association representative needs to check with legal counsel before completing or returning the items. This takes time and costs money. A $50 or $100 transfer fee does not cover all the costs involved in satisfying a seller's requests and a realtor, an escrow officer and a lender's "demands."
Yet, as you can see by the language in the statute, the legislature has attempted to trim all "fat" off of the transfer fee entitlement.
WHAT DOES THE FUTURE HOLD?
The CID industry includes realtors, title companies, and lenders and all can be well served by new services offered through technology that speed up and ease the processes. Consider that companies like CONDOCERTS.com are offering management companies and associations the opportunity to put their documents on the web, so realtors, title companies, and lenders can get them without having to contact anyone. The lender, title officer or realtor often pays the fee. What a concept! Some standardization is generated by providing questions and posting information that managers can update with the push of a button, information that satisfies most lenders. A lack of standardization has been one of the biggest complaints in the industry. Of course, there are still other things that require association or management response with regard to a sale or refinance. And the charge to get these documents quickly in this manner has a built in "rush" element to it, i.e., instant gratification! No one has to wait 2 or 3 or 10 days. The interesting dichotomy here is that everyone wants the information faster, and upon demand, but many are resistant to paying for it.
EXAMINING THE ABOVE STATUTES, WHAT CAN MANAGEMENT COMPANIES AND ASSOCIATIONS DO?
As far as I can tell, these are some viable suggestions:
- Stop using the term "transfer fees" to describe charges related to sales and refinances.
- Adopt the Mortgage Lenders practices of providing explanatory disclosures explaining financing and refinancing fees and costs, so that people understand why they have to pay fees.
- Break down the charges according to the service being provided as some of the management companies and associations have done into categories like:
- Phone calls fees
- Document production fees
- Copy Costs
- Document delivery fees
- File Review or Investigation fees (to check for outstanding violations on the property)
- Lender/Escrow Certification Form fees
- Certification of Assessments fee
- Civil Code 1368 form completion fees
- Occupancy percentage investigation and Certification fees
- Update membership records fee
- Special Litigation Check and Letter fees
- Attorney Review Fees (for special forms or requests)
- Fees for amenity use cards, gate and recreational facility passes and/or keys
- Update Emergency Information fees
- Rush Fees
If your Board decides that the services involved in transfer of memberships and refinances should be a cost of doing business and not a cost of sale for Seller, that is an option. You certainly could escape any possibility of being challenged for charging burdensome or unfair "transfer fees". However, keep in mind that the costs have to be absorbed into the budget which, for many associations, are already stretched to the max with rising costs for utilities, insurance, water, and maintenance of infrastructure. And also keep in mind that there is a good chance the reserve savings laws will be beefed up in the coming years and a substantial number of Associations will have to impose extra assessments or increase regular assessments to fund the reserves. Consider whether it is a good business decision to absorb all fees related to transfer of records. I suggest that a reasonable balance should be established.
By Beth A. Grimm, Esq., an educator and an attorney who practices exclusively in the area of homeowner association law. She is an active member of two ECHO RESOURCE PANELS (EAST BAY AND LEGAL) and is a frequent contributor to the ECHO JOURNAL and other CID industry publications in California. She is also an author of additional publications, and offers lots of free information at http://www.californiacondogurul.com.
By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.