Private Transfer Fees Relieve Burden On Cities, Reduce Homeownership Costs

NEW YORK, Aug. 31 /PRNewswire/ -- Streets, wastewater lines, lift stations, paving, engineering, impact fees, permits:  these are all part of the multi-million dollar costs necessary to develop a modern subdivision.  Traditionally, a developer divides the number of lots into the development costs, and the result is passed on to the initial buyer.  Modernly, some developers elect to impose a 1% Capital Recovery Fee (also called a transfer fee), and, in consequence, lower the sales price.

"If builders were not allowed to pass along costs in a transfer fee, they'd have to make up for it by adding thousands of dollars to their homes' initial selling price, shutting out buyers." California Building Industry Association.

Capital Recovery Fees have been referred to as development bonds.  According to Freehold Capital Partners, this is because the future transfer fee income stream can be packaged into large pools and sold to investors.   In return, the developer obtains the reimbursement of capital that otherwise would have to come from the initial purchase price charged to buyers.  Buyers enjoy a lower acquisition cost, which leads to transactional savings and to substantial savings in interest carrying costs over the life of the mortgage.

This process is similar to the process used for municipal utility districts (MUDs) and Mello-Roos districts.  All of the foregoing serve one purpose:  to repay the developer for multi-million dollar developments costs by spreading the costs out over the beneficiaries. The article MUNICIPAL UTILITY DISTRICTS PROMOTE DEVELOPMENT ALONG CITIES' BORDERS, by Kathryn Eakens, is instructive:

"The developer, rather than the city, is responsible for the infrastructure, and then the MUD sells a bond to pay back the developer. What helps the city to some degree is MUDs are fairly self-sustaining," [ Charley] Ayres [VP of business expansion for the City] said. "…the city doesn't have to spend as much on those homes as it does on homes within the city limits as far as infrastructure."

Capital Recovery Fees have one big advantage over MUDS and Mello-Roos: the buyer is not saddled with recurring annual debt.  Instead, the fee is payable at the time of sale.