AUSTIN, Texas, Feb. 17, 2017 /PRNewswire/ -- Paved streets … sewer lines … impact fees … amenity centers: these are all part of the multi-million dollar costs necessary to develop a modern subdivision. Traditionally, developers pass 100% of these costs to the initial buyers. Modernly, many developers utilize Capital Recovery Fees (also called a private transfer fees), resulting in a lower initial sales price. By spreading development costs over all participants, buyers enjoy lower acquisition costs, which reduces closing costs and mortgage interest.
"If builders were not allowed to pass along costs in a transfer fee, they'd have to make up for it by adding thousands of dollars to their homes' initial selling price, shutting out buyers." California Building Industry Association.
Municipal Utility Districts (MUDs) and Mello-Roos districts also repay developers for multi-million dollar developments costs. The article Municipal Utility Districts Promote Development Along Cities' Borders, by Kathryn Eakens, is instructive:
The developer, rather than the city, is responsible for the infrastructure, and then the MUD sells a bond to pay back the developer. What helps the city to some degree is MUDs are fairly self-sustaining, [Charley] Ayres [VP of business expansion for the City] said, "…the city doesn't have to spend as much on those homes as it does on homes within the city limits as far as infrastructure."
However, as Freehold Capital Partners (http://www.freeholdcapitalpartners.com) the primary originator of Capital Recovery Fees, points out, Capital Recovery Fees have one big advantage over MUDS and Mello-Roos: the buyer is not burdened with recurring annual debt payments, which also negatively impacts mortgage qualification. Instead, a Capital Recovery Fee is payable at the time of sale, and therefore is not included when calculating a borrower's debt service.
Freehold Capital Partners also points out that for buyers who prefer to pay 100% of development costs up front, finance those costs, and pass them along to the next buyer, numerous alternatives exist. However, for buyers who prefer to buy more home for the money, and have lower monthly costs, a private transfer fee offers an attractive alternative. After all, why should a homeowner who will live in a subdivision for 5-7 years pay 100% of the costs for roads and amenities that will be used by others for generations?
SOURCE Freehold Capital Partners