AB 1139 Imposes New Notice Requirements on Deed-Based Transfer Fees

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disclosureOn July 31, 2017, Governor Brown signed Assembly Bill 1139 (“AB 1139”) into law.  AB 1139 amends California Civil Code Section 1098.5 with regard to deed-based transfer fees (“Private Transfer Fees” or “Fees”).  Prior to AB 1139 becoming law, any individual or entity who imposed a Fee on real property on or after January 1, 2008, had to record a document that provided limited notice of the Fee on or before January 1, 2009.

AB 1139 now requires any individual or entity who imposes a Fee on real property on or after February 8, 2011, to record a document that contains very specific language with regard to notice.  The notice must now state that federal housing agencies are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a “direct benefit” to real property encumbered, and that if a person purchases such a property, that person may have difficulty obtaining financing.

 Brief Background

Private Transfer Fees are fees paid by a purchaser when real property is resold.  The Fees are typically one percent (1%) of the sale price of the real property and specified in the original purchase documents.  The Fees are typically paid from the purchaser to one of four groups: 1. the HOA, 2. tax-exempt groups that provide a direct benefit to the HOA, 3. tax-exempt groups that don’t provide a direct benefit to the HOA, and 4. third-party developers or investors.

FHFA Regulations

As Private Transfer Fees began to grow in popularity with HOA developers, the Federal Housing Finance Agency (“FHFA”) proposed new regulations that would have prohibited HOAs with Private Transfer Fees from obtaining federal loans.  These proposed regulations came about because of the U.S. Department of Housing and Urban Development’s position that the FHFA and the Federal Housing Administration (“FHA”) were not permitted to insure mortgages on real property that came with “restrictions on conveyance”, i.e. encumbrances on title that could hamper transfers (a.k.a. Fees).  Within the HOA community, there was significant concern that such regulations would stifle HOA property sales and put many HOAs in further financial jeopardy.

However, after a period of intense lobbying, the FHFA ultimately adopted legislation that allowed Fees where a “direct benefit” was provided to an HOA.  The Fees allowed by the FHFA would be those paid to an HOA directly or to tax-exempt groups that provide a direct benefit to an HOA.  Section 1228.1 of Chapter XII of Title 12 of the Code of Federal Regulations defines direct benefit for purposes of a fee as “the proceeds of a private transfer fee that are used exclusively to support maintenance and improvements to encumbered properties as well as cultural, educational, charitable, recreational, environmental, conservation or other similar activities that benefit exclusively the real property encumbered by the private transfer fee covenants.”

In addition to only allowing Fees that provide a direct benefit to the HOA, the FHFA also required that the notice regarding the Fee must state the following in at least 14-point boldface type:

“The Federal Housing Agency and the Federal Housing Administration are prohibited from dealing in mortgages on properties encumbered by private transfer fee covenants that do not provide a ‘direct benefit’ to the real property encumbered by the covenant.  As a result, if you purchase such a property, you or individuals you want to sell the property to may have difficulty obtaining financing.”

California HOA lawyers AB 1139 conforms the California Civil Code to current federal regulations regarding Private Transfer Fees and clarifies that these types of Fees are only permitted where they provide a “direct benefit” to the real property encumbered.  The notice requirements imposed by AB 1139 are common sense and are designed to provide greater transparency and information to prospective purchasers with regards to their ability to obtain a federal loan when they are looking to purchase a property within an HOA that is encumbered with a Private Transfer Fee.  Ultimately, a purchaser of real property in an HOA will need to ensure that the Private Transfer Fee is for the “direct benefit” of the HOA in the event they need to obtain federally funded financing.

-Blog post authored by TLG Attorney, Kyle B. Roybal, Esq.