Costly clause

A DEVELOPER BUILDING a housing tract wants to do its part in preserving adjacent wetlands, helping the community’s homeless or providing perpetual funding for nearby park maintenance. The company hits on an ingenious solution: a perpetual fee (called “reconveyance”), grafted right into the deed as a percentage of the sale price, that each buyer of the property must pay. Forever. This new contractual scheme has begun to spring up all over California.

If the fee is 1%, and the initial sale price is $500,000, the buyer pays the developer an additional $5,000 for whatever works the builder is supporting. So far, so good. The two parties met, negotiated a price, understood the terms and made the sale.

But now a decade goes by and the homeowner, wanting to move on, finds a buyer and negotiates a new price. Say, $1 million. Because of the reconveyance-fee clause in the deed, the new buyer has to pay an extra $10,000. Not to the seller or to the tax collector or to the title insurance company, but to the original developer. One hundred years from now, after perhaps a dozen more buyers and sellers, the latest owner will still have to pay what amounts to a private tax to the developer’s heirs or successors, a person or entity the buyer and seller never knew and won’t otherwise deal with.

That’s bad policy. The freedom to contract presupposes that willing buyers and sellers can reach agreements between themselves, without a third party taking an unearned cut. Yes, the government is a sort of third party that can collect taxes that, we hope, will be used to support fundamental public services. But if homeowners decide those taxes are too high, or are no longer needed, they have the power to roll them back through the political process. That’s what Proposition 13 was all about.

If homeowners decide, on the other hand, that they no longer want to pay reconveyance fees -- because the wetland that was supposed to be protected has dried up, or maybe the homelessness problem has evaporated -- they are powerless to eliminate the fee unless they manage to talk the developer’s heirs out of their free revenue stream.

A bill working its way through the Legislature, SB 670, would put a stop to the reconveyance-fee scheme in California, and it should be supported. Builders who oppose the bill, along with conservationists and housing advocates, argue that buyers who don’t want to pay the fee are free to choose some other house. But reconveyance fees are becoming increasingly popular and could soon find their way into the majority of new real estate deeds.

Builders have responded with a bill that would require them to describe and record the purpose of the fee on the deed, which is a step in the right direction. But it’s not enough. Developers deserve credit for seeking funding solutions for long-standing problems, but they need to do it without saddling future generations with financial obligations they never negotiated.