Prohibition on Fannie and Freddie Lending on Property with Transfer Fees
Conservation projects and stewardship funded by transfer fees have new challenges under a Federal Home Finance Agency (FHFA) rule adopted in March 2012 that prohibits acceptance of mortgages in the secondary market where a perpetual transfer fee burdens the property (with a few limited exceptions).
The new rule allows homeowner association fees and other fees that benefit the property directly. Transfer fees created prior to February 8, 2011 are grandfathered under the rule, and government fees and one-time fees are exempt. The rule is retroactive to February 2011 and is effective July 16, 2012.
The FHFA rule permits lending in the secondary mortgage market on properties that have a transfer fees to fund services that only directly and exclusively benefit the encumbered property such as maintenance of community buildings and common areas in developments; however, the further the use moves from a direct and exclusive benefit to the encumbered property (not the fee holder) the more uncertainty the new rule creates. Careful review by the land trust attorney of both the federal rule and any state statute is essential. Remember that the federal rule only applies to loans sold on the secondary market on property encumbered by a prohibited transfer fee. Please remember that Fannie and Freddie field agents are not knowledgeable about conservation and that in a close call the agent may elect to assume your transfer fee does not sufficiently benefit the property.
We also have mixed results at the state level with prohibitions against any transfer fee in approximately 29 states and exemptions in 18 of those states. The combination of the federal lending prohibition and the state statutes limits stewardship funding options using a perpetual transfer fee.
The Pennsylvania Land Trust Association developed an approach to having present and future landowners fund stewardship that appears to avoid all of these problems. It does not address those easements however caught in the retroactive portion of the FHFA ruling that applies to the secondary market nor does it address any lender chilling effect on conservation easements generally.
Because most of the prohibition laws make exceptions for amounts payable by a borrower to a lender pursuant to a loan secured by a mortgage against real property, treating long-term owner stewardship obligations as a loan from the holder that otherwise would have been payable at easement closing (1) is a good practice for ensuring enforceability of payment and (2) probably conforms with your transfer fee law in your state (but your attorney needs to check) and (3) probably is exempt from the new FHFA rule. (See PA's Model Conservation Funding Covenant as well as the guide on "stewardship fees") The Pennsylvania Land Trust Association will update its model and guide within the next few weeks to address the implications of the FHFA rule and further minimize its potential application.
You can also see the article on Conservation Stewardship Transfer Fees: The conservation gifts that keep on giving, by Paul Doscher and Thomas N. Masland, Esq. Bear in mind that you may need to convince the lender that the fee has a direct benefit to the property regardless of what model you use.
The revised federal rule significantly broadened the definition of a “direct benefit” after FHFA received thousands of comments from a coalition of charitable and community groups that use transfer fees of which many land trusts and The Land Trust Alliance were a part. Properties with transfer fee covenants providing direct benefits to the property are excepted from the rule, however FHFA’s intent articulated in its published guidance is to require a direct connection between the transfer fee and a substantial benefit to the encumbered property. To be a direct benefit the fee must either support maintenance and improvements of the property used primarily for the benefit of members of the homeowners’ association including off-site facilities used by members of the homeowners’ association. The fee could also support cultural, educational, charitable, recreational, environmental or conservation activities if the covered homeowner or other association uses fees to support adjacent property such as parks or trails that the homeowners’ use or on non-adjacent property that the residents of the encumbered property primarily use. The rule does not define adjacent or primary.
FHFA specifically declined in its written explanation of the rule to exempt transfer fee covenants that promote general environmental protection or resource conservation that benefits society at large unless it can be shown that the activities the fee funds provide a direct benefit to the burdened properties. Nonetheless, this is an improvement over the originally proposed full prohibition on all transfer fees.