 NAR has become aware of a company which is soliciting real estate professionals to participate in a transaction that contains possible risk for real estate brokerages. The solicitation seeks the real estate professional’s participation in a business model that encumbers an owner’s property with the obligation for all future buyers of the property to pay a 1% “transfer fee” for the next 99 years, with the “transfer fee” being split between the current property owner, “transfer fee” company, and the broker. Because the model involves the payment of future fees, real estate professionals without the necessary licenses who enter into these transactions may be engaging in an unlicensed activity and may also face future litigation.
The Model The model works in the following way: first, the broker is contacted by the “transfer fee” company about a specific property. The “transfer fee” company sends documents to the broker for the broker to use in arranging with the property owner the placement of a “transfer fee” deed covenant on the property. If the documents are fully executed, a 99-year restriction on the property’s transferability will be created which will require the payment of a “1% transfer fee” every time the property is sold for the next 99 years. The “transfer fee” would be paid by all subsequent buyers, with the fee being split in the following manner: 60% to the original owner who created the restriction, 30% paid to the company proposing the transaction, and 10% to the broker. The covenant purportedly creates a lien against the property if the transfer fee is not paid. The company’s documents contain a provision directing “immediate” payment of $1,000 to the broker by the property owner upon the seller’s creation of the transfer fee rights. The “transfer fee” company also gives the property owner a note in return for its interest in future transfers, with the note intended to reflect the amount of payments that the property owner will receive over the course of the next 99 years. The “transfer fee” company claims that it has patented its transfer system and that the system is used by other companies. The supposed rationale for this model is that it allows property owners to capture any future appreciation by the property. Dangers Posed by “Transfer Fee” Model The “transfer fee” model creates a number of potential problems. For real estate professionals, there are possible legal and liability risks for engaging in this type of transaction. Real estate licenses generally do not authorize licensees to negotiate the sale of an interest that is given as security for the performance of an obligation. Because this type of deed covenant would likely be considered a security for the payment of future transfer fees, negotiating or creating such a covenant or restriction might require another type of license, such as a securities or law license. There are also possible liability risks for real estate professionals, as these transfer restrictions may make it difficult for the current owner to sell the property, which could result in litigation against the real estate professional who advised him/her on the benefits of entering into this type of transaction (and may not have been appropriately licensed). If a real estate professional does decide to proceed with this type of transaction, they should obtain legal counsel and advise the property owner to also seek counsel. A real estate professional may also want to seek the opinion of the state’s licensing body to see if a real estate license permits the real estate professional to engage in this type of transaction. Other problems can arise from the creation of these “transfer fees” in both current and future transactions. As noted above, one potential problem could be a buyer’s refusal to pay the transfer fees, resulting in the collapse of a potential transaction. This risk may be exacerbated in the future, especially if future owners attach their own “transfer fee” covenants to the property. Title companies have also expressed a number of concerns about these covenants. One problem could be locating those entitled to receive the transfer fee proceeds, especially further into the future. Title companies also have expressed concern that these types of covenants could be seen as first liens on properties, meaning that the Fannie Mae or Ginnie Mae or state chartered savings and loans may not be able to become involved in these transactions unless the covenant is removed from the property. Conclusion
Real estate professionals face risks from engaging in the “transfer fee” model transaction, ranging from engaging in an unlicensed activity to possible litigation. The imposition of this covenant on an owner’s property title may also create other problems for the transfer of title. Real estate professionals should use extreme caution if they choose to contact owners about using the “transfer fee” model. Have any of you been solicted or impacted by this activity? | 
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