Developer fees a.k.a. capital recovery fees

Imagine this scenario: You have to move because of your job. You have lost all of the equity in your condo that you purchased two years ago, but thankfully, you are not underwater and will break even on the sell. You arrive at the closing and suddenly you discover that you owe a fee of 1% of the sales price to the developer from whom you bought the condo two years earlier.

Now, because of this “Developer Fee”, you have to bring cash to close on the sale of your condo. Below is a quick Q and A on developer fees.

What is a developer fee?

A developer fee (also known as a capital recovery fee) is a private transfer fee provision requiring you to pay an amount to your developer when you sell your house or condominium in the future.

What has prompted the emergence of developer fees?

As developers have seen sales prices plummet, attaching a developer fee allows the developer to recoup the loss in sales price by guaranteeing itself future gains from future sales of the property.

When does a developer fee expire?

It depends on the terms of the specific agreement, but some private transfer fee provisions continue for as long as 99 years and can apply to all future sales in those 99 years.

How large is a developer fee?

Typically, a covenant is established that provides for 1% of the sales price to be paid to the developer. Since this is a covenant that runs with the land, if it is unpaid it creates a lien or cloud on title, preventing the property from being resold or refinanced until it is paid, plus interest. The fee must be paid even if the property depreciates in value – so a homeowner with declining equity is still responsible for paying the fee.

Are developer fees legal?

As of this blog, 12 states have adopted legislation banning private transfer fees. The American Land Title Association is attempting to have the fees banned and declared illegal everywhere else. The practice has been banned in Maryland, but so far no action has been taken in Virginia or the District of Columbia.

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