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HomeMy WebLinkAbout8.) Discussion on Real Estate Transfer TaxVillage of Mount Prospect Mount Prospect, Illinois INTEROFFICE MEMORANDUM TO: DAVID STRAHL, ACTING VILLAGE MANAGER FROM: ADMINISTRATIVE ANALYST DATE: APRIL 23, 2015 SUBJECT: REAL ESTATE TRANSFER STAMP PROCESS DISCUSSION PURPOSE: To present for the Board's consideration proposed changes to the real estate transfer stamp issuance process. BACKGROUND: Current Issues: The February 24, 2015 Committee of the Whole meeting outlined challenges that new residents may experience when they purchase a real estate transfer stamp. The majority of municipalities with a real estate transfer tax place the responsibility for payment on the seller. Mount Prospect's transfer tax was established with the buyer as the party responsible to pay. The buyer may be delayed in purchasing the transfer stamp if there are outstanding payments, fines, or property issues that the seller has not addressed. The transfer stamp process is the final opportunity for the Village to resolve any outstanding issues with the seller. In addition, the Village's utility account process is coupled with the transfer stamp process. A transfer stamp will not be issued until Finance has the necessary documentation to establish a new utility account in the buyer's name and a billing address to forward the seller's final water bill. The buyer's experience with the Village's transfer stamp process is dependent on a number of factors. When all the proper documentation is provided and there are no items for the seller to address, then the total time for Finance — Customer Service to issue a transfer stamp is about 20 minutes. It is Finance's practice to process transfer stamps within 72 hours. Initial Issues Addressed: In order to address the above challenges staff recommended shifting the responsible party for payment of the transfer tax from the buyer to the seller and decoupling the real estate transfer stamp issuance process from a new utility billing account. A shift of responsible party would allow the Village to be synchronized with the majority of the surrounding municipalities. It would also require the seller to address outstanding issues without involving the buyer. Staff proposed a phase-in period to smooth the transition from buyer to seller that would extend one year from the effective date of the change. During this an Real Estate Transfer Stamp Process Discussion April 23, 2015 Page 2 period the transfer tax amount would be adjusted based when the resident last paid the real estate transfer tax. The other recommendation was to decouple the real estate transfer stamp issuance process from utility billing. These processes were initially linked to ensure the proper transition of a utility account to new customers. Staff feels it is no longer necessary to link these processes, since utility account administration and complying with the Fair and Accurate Credit Transaction (FACT) Act (Red Flag Rules) can be met with separate internal controls. Villaae Board Direction: During the February 24, 2015 Committee of the Whole meeting there was general consensus by the Village Board regarding the simplification of the real estate transfer stamp process. The Village Board requested staff to review the steps in transferring responsibility from buyer to seller and an extended tax rebate option. DISCUSSION: Further Analysis Staff built on the initial analysis by conducting multiple surveys and analyzing data from comparable communities, Northwest Municipal Conference and other municipalities that place the responsibility of transfer tax payment on the buyer. Data collected examined real estate transfer stamp issuing processes, utility billing administration, and requirements to create a new utility account. Party Liable for Real Estate Transfer Tax Payment Additional analysis was conducted regarding party liable for transfer tax payment. Staff's February 24, 2015 presentation addressed that the Village is in the minority of municipalities that have the buyer as the party liable for transfer tax payment. Seventeen municipalities in the Chicagoland area, in addition to Mount Prospect, established the buyer as the party liable for transfer tax payment. Eight of these municipalities were surveyed regarding their transfer stamp process and seven completed the survey. All respondents reported that staff and customers are satisfied with their real estate transfer stamp process and they are not interested in shifting the party liable for payment. Generally, the respondents' processes are similar to Mount Prospect's, since they use the process to address outstanding debts or violations with the property seller and also their utility billing is coupled the with transfer stamp process. In addition, staff requested information from the Cook County Recorder of Deeds office inquiring if any municipality has switched the party liable for payment; unfortunately the County does not have such records. Staff also evaluated a rebate option that would adjust for the double taxation scenario that would be created for a resident who purchased a home after November 1987 and sold after the liable party for payment switches to the seller. Transfer records for the month of May 2014 were used to calculate the potential financial impact of this rebate option. The month -2- Real Estate Transfer Stamp Process Discussion April 23, 2015 Page 3 of May was selected because more transfer stamp transactions are processed during spring months and the data would provide for a larger sample size. Prior property purchase price was obtained through the Cook County Recorder of Deeds website. Table 1 summarizes findings of this analysis. Table 1: Real Estate Transfer Tax Rebate Scenario's Revenue Totals for May 2014 (Does not include Exempt Stamps) Total Tax Collected In May 2014 (a) For this scenario, amount reflects the potential total tax collected at the time of sale by the SELLER. (b) Does not include exempt tax amount. Previous Tax Collected From Sample Properties When Last Sold (a)13 properties = No record of prior transfer or no amount was included in the recorded record. (b) 26 properties last transfer was exempt (Quit Claim Deed and Lis Pendens Foreclosure) and exempt amount are not included in the total. Total Tax Collected At Sale Minus Tax Paid At Previous Purchase (a) If difference is neqative, amount changed to $0. $51,660 Lost Revenue When Rebate Is Applied For Sample Properties Previously Sold $22,233 If the rebate was in effect during May 2014 it would have reduced revenue by an estimated $22,233. This figure could also be interpreted as an estimated average loss of $240 per transfer transaction. Expected losses would reduce as more properties transfer after the party liable for payment changes to seller; however, if someone purchased a home today and stayed in that home for 40 years rebates could still be issued in 2055. Outstanding Payments/Real Estate Transfer Process Historically, the Village has used the sale of a transfer stamp as an opportunity to obtain a final water meter read, collect on any outstanding bills, and address any property alerts which are generally community development and public works related issues. Further research has confirmed that Mount Prospect's practice is common among municipalities that issue transfer stamps. There are some municipalities that only require the final water bill to be paid and there are also other municipalities that require a property inspection the before the stamp is issued. Utility Billing Additional data collected regarding utility billing processes focused on reviewing two concerns. The first concern is that the transfer stamp sale would be put on hold if the required documents are not provided to open a utility account in the buyer's name. Survey respondents provided internal process information and most have their transfer stamp process coupled with utility billing. Generally, the link between the processes is related to utility billing needing a name to open a new utility account, but two respondents require the —3— Real Estate Transfer Stamp Process Discussion April 23, 2015 Page 4 new utility account to be created to initiate a final water meter read for the seller. The second concern is in regards to the Fair and Accurate Credit Transaction (FACT) Act (Red Flag Rules) and forms of identification recommended to be presented in order to create a utility account. Surveyed municipalities were asked if they follow the FACT Act and what types of identification are require for opening a utility account. Attachment A presents the data provided by respondents. Of the Village's comparable communities, most state they comply with the FACT Act, but only Buffalo Grove requires photo identification. On the other hand, some communities do not require any documentation at all. A potential viable solution that could provide compliance with the FACT Act is to accept transfer documents such as the Declaration form, deed, or closing documents to open a utility account. Rental units are handled differently and require the property owner to confirm the tenant's utility account, since the owner is ultimately responsible for tenant's water bills. Currently, the Village also requires renters to provide photo identification, but alternatives may be a copy of the lease or the Village's required Crime Free Housing Lease Addendum. Existing Rebate Program for Residents that Relocate within the Village A resident who has owned and occupied a single-family residence within the Village and who has paid the real estate transfer tax is eligible for a rebate of $2.00 for each $1,000 of the purchase price. Staff's experience in issuing this rebate is that the amount rebated on average is greater than the amount initially paid. The difference totals to $20,000 of lost real estate transfer tax revenue. This negative financial impact to the Village's budget could be compounded in light of the uncertain status of state shared revenues (i.e. Local Government Distributive Fund). Alternatives - Party Liable for Real Estate Transfer Tax Payment The initial staff recommendation included a one year phase-in period that provided for a reduced tax rate for properties previously purchased within a certain timeframe. Staff conducted additional research regarding the Village Board's direction to measure the impact of a rebate with an extended timeframe. This rebate option creates a negative financial impact to the Village's budget as revenue would be lost and real estate transfer revenue projections would become less predictable. Additionally, any residential property sold from November 1987 to the effective date of the switch might be eligible for a rebate and this would add a processing step to the transfer stamp workflow for the foreseeable future. The responsible party for the transfer tax would be required to provide the appropriate documentation for Finance to issue a rebate. The following alternatives provide transfer stamp workflow improvements without switching responsibility of transfer tax payment to the seller. Outstanding Payments/Real Estate Transfer Process Currently, the real estate transfer process is the final opportunity and an effective check on a seller's outstanding debts at the potential inconvenience of the buyer. Staff's alternative is to only hold the sale of the transfer stamp to address code violations, recorded liens and -4- Real Estate Transfer Stamp Process Discussion April 23, 2015 Page 5 adjudicated amounts. The seller's outstanding police tickets, miscellaneous billing, and licensing items would be removed from the transfer stamp issuance work flow. This would improve the buyer's experience and further streamline the transfer stamp process. Staff would attempt to collect on outstanding police tickets and miscellaneous billing amounts by the Village more aggressively pursuing payment and referring debts to collections. However, with this method there is a greater chance the Village will not recover all outstanding debts. Utility Billing Staff can improve the transfer stamp workflow by decoupling utility billing and the real estate transfer stamp process. A potential alternative is for staff to sell transfer stamps without requiring the new utility account to be established. This would allow real estate agents and law firms who manage property transfers to purchase the stamp on the buyer's behalf without having the information needed to create a utility account. If the buyer was to purchase their own transfer stamp, they would still be able to simultaneously establish their utility account. Staff would develop an internal tracking and processing solution for utility accounts not established at the time the transfer stamp is sold. A generic 'resident' account would be established for the property and the new resident would be given 14 days to provide identification and billing information. Staff would also develop a utility account activation form. Des Plaines `New Resident Request for Water & Garbage' form is attached for an example. A form would be required since the trigger to create the account would be removed and the buyer would need to initiate that process. The seller would be liable for water used up to the closing date provided on the documents required to purchase the transfer stamp. Also, the need for scheduling a final meter read for the seller would be significantly reduced once the Automated Meter Reading system installations are completed. By limiting the outstanding debts and decoupling the utility billing process from the transfer stamp workflow staff estimates the adjusted total transfer stamp task time would reduce from 20 minutes to between 12 and 15 minutes. FACT Act and Alternative Forms of Identification In addition to the above transfer stamp process alternatives staff proposes to add more forms of acceptable identification to further enhance the process to activate a utility account. Staff reviewed using real estate transfer documents such as the Declaration form, deed, or closing documents as acceptable forms of identification to open a utility account. For example, the declaration form, either a P -Tax (paper version) or MyDec (electronic version), is required to issue a transfer stamp. Finance retains a copy of these documents when a transfer or exempt stamp is sold. The form requires both the seller and buyer or their agent's signatures to verify to the facts stated in the declaration are true and correct. These additional proposed forms of identification were reviewed by the Village Attorney and staff was advised these documents would meet the intent of the FACT Act and the associated final Red Flag Rules. Since Finance already requires these documents to issue -5- Real Estate Transfer Stamp Process Discussion April 23, 2015 Page 6 a transfer stamp, the buyer would not have to provide any additional identification. A copy of photo identification would be accepted as a secondary form of identification, but would no longer be required. RECOMMENDATIONS: • Staff would not request a modification of the party responsible (buyer to seller) for payment of the real estate transfer tax beyond the initial proposed rebate phase-in period of one year due to the negative financial impact of an extended rebate period. The impact is directly related to a rebate period and with a shorter period the impact is reduced. • Staff recommends modifying the transfer stamp issuance process to limit the review of outstanding debts to only code violations, liens, and adjudicated amounts. Other outstanding bills would be addressed through Finance or collections. • Staff would allow transfer stamps to be issued without requiring a new utility account to be established at the time the stamp is sold. Staff would manage utility account changes with a separate process. • Staff also recommends accepting additional forms of identification to establish or change a utility account to provide flexibility to residents. • Staff recommends discontinuing the existing rebate for residents who relocate their single-family residence within the Village. This would support the preservation of a revenue stream. ADB c: Finance Director David Erb Deputy Finance Director Lynn Jarog Document2 Q.� Alexander Bertolucci Administrative Analyst Real Estate Transfer Stamp/Tax Attachment A March 2015 FACT Act/Red Flag Rules New Utility Account Requirements Addlson# _ Yes YES 2 types of ID/ 1= Maio ID Lease or Owner Verifv Information ' MatoID Arlington Heights* No Name, Phare NurrdLrrI-Adore-, Driver License/State ID Number+:*• -r No COD-, OL# No Yes With a government -issued picture ID, come in to the Village Hall at 200 S. Hough Street, to set up your utility Barrington+ billing account. Photo ID Buffalo Grove* Yes Yes Vinage. Forth and a Copy of a Photo ID Photo ID O estao isn water service the owner of the property must provide proof of ownership in the form of a No Yes settlement statement or deed. The owner must also fill out our water application and provide a form of picture Carpentersville+ Identification. Photo ID Des Plaines *+ Yes Yes Village Form Village Form Deed/ Yes Yes Declaration Elk Grove*+ No Photo ID required. Use transfer stamp documents Call to verify with property owner Form Glenview* No No Doc,i menta • Only a Phone Call None _ We request a written closing statement from a lawyer or _ the real estate agent involved in the closing. If the closing already happened then we request closing No X documentation that presents both parties Involved for the sale or transfer of ownership to open the new We do not open accounts for tenants therefore the Closing Fox Lake+ owners account. requirements do not aooiv nor differ. Documents Yes No For owner occupied property we use the information For rental property, we ask for a copy of a driver's Hoffman Estates*+ from the deed when they purchase the transfer stamp. license. Landlord can request that a duplicate copy of the water Deed Yes Yes bill be sent directly to the renter. The water account Deed/ will remain in the owner's name and the owner will Declaration Lake Forest+# Deed and Declaration Form signed by both parties continue to receive the water bill. Form Owner property must purchase real estate transfer tax Our utility clerk receives a verbal notice or Yes Yes stamp, I trust the banks and title company have confirmation from the owners when a new renter is Lincolnshire+# sufficiently reviewed the owners identification. moving in. Stamo Niles+# Yes Yes Acopy ofthe Village ofNiles Community [sivL,;oprnun[finalim;;cruunr,ea't Village Form Northbrook* No No Documents. guar -:c ai;d A::cress • Only Phar--- :all None For Renters we make sure that the address has a rental We do not ask for documents yet, because most people license and we ask that both the owner and renter call do not want to fax or email such documents for identity and verify that the account should go into the new No Yes theft issues so we usually ask for the last 4 digits of SS # renters name. Since Owners still have ultimate so we can identify them if they call to inquire on their responsibility for the bill their name remains on the Last 4 digits account. We also check the tax records to verify account as an associated customer so we can bill them of SS#, Tax Palatine*+ ownership periodically. if the renter does not pay. Records Complete transfer declaration form (CD), submit slip for final meter read (FI), Water account is established with the owner's name off of transfer declaration. Finance calls owner to verify. No SS# or other Identification. Yes Transfer Declaration - CD sends list to FI of all of new Water bill stays in owners name. Owner is ultimately owners at the end of the month - Information collected responsible for bill. Finance will not discuss water bill off of actual deed. FI cross checks new water accounts with tenants, unless owner submits authorization to Declaration Park Ridge* with CD list. allow communication. Form Rolling Meadows* Yes Basic ,formation, Phone Number, Move in date - Village Compl�tcs Internal Form None Complete Application for Service Form. If you are renting the home, you will need a copy of Yes X If you own the home, you will need to provide a copy of your lease, your landlord's name, address and .your warranty deed, If It is not currently on file with the telephone number and a $100.00 security deposit. Romeovllle# Village. Please Note: To open a Utility Account in a tenant's Deed Real Estate rax Declaration we use for a new account in _ Schaumburg. In addition to this form, we require a copy Declaration, Yes Yes of the Deed and PTAX 203 which validates the new Utility Billing Account Application used for accounts Deed, and Schaumburg*+ owner information. with a rental property PTAX Skokie* Yes Call in overthe phone. No documents are required. Owner will call In, some times tenet will call in. _]None As a residential property owner, you will automatically If the property is a rental unit, an application for Yes Yes be billed for water and sewer services, based on service must be signed by both the owner and the 1VIIIage Streamwood+ consumption. tenant. Form If renter is placed on the account, complete a basic No No Information form and submit a copy Driver's License. Also provide $100 deposit, which will utlllmately be Village Form/ Wheeling* Complete Real Estate Transfer Certificate applied to future final water bill. 1D for Renter Wilmette# Yes No I.D. Is necessary. All we need is the buver's name. None ._.._... ---...._.........._...--- The Village mustverify your identity in order to provide service, so you will be asked to show a government - No issued photo I.D. in order to establish service. The Village will accept a photocopy of your out-of-state photo ID if Winnetka+ you are new to Illinois. Photo ID • = indicates Comparable Community += Northwest Municipal Conference Community # = indicates Buyer Liable for Payment Community —7— CITY OF DES PLAINES NEW RESIDENT REQUEST FOR WATER & GARBAGE Please fill out this form if you are a new resident and need to set up water and garbage billing in your name. Requestor• Service Address: Date of Closing: Move Date: Inside Read: Outside Read (If Applicable): Date of Read: Phone Number: Social Security Number: If you are a tenant, please fill out the following information: Landlord Name: Landlord Address: Landlord Phone Number: Mail this form to City of Des Plaines, Utility Billing, 1420 Miner Street, Des Plaines, IL 60016 or Fax lo: 847-391-5402 Office Use Only Account Number: —8— CITY OF DES PLAINES REQUEST FOR NAME CHANGE FOR WATER & GARBAGE BILLING DFS P!..a!; E2 please till out this form if you wish to change the name on your utility billing account. If I'LIN0111 your request is for a final bill, please fill out the "Request for Final Bill" form. If your request is to establish a new account, please fill out the "New Resident Request" form. Account Number: Date of Request: Requestor: Service Address: Current Name on Account: Change Name to: Contact Phone Number: Signature of Requestor: Mail this fornz to City of Des Plaines, Utility Billing, 1420 Miner Street, Des Plaines, IL 60016 or Fax to: 847-391-5402 —9—