Sep 8, 2006

The "Flip Tax"


 

Creative Financing or a Coop Cop Out ?

The flip tax is a transfer fee that many new york coops impose on shareholders. In the late seventies and early 80's when many rental buildings converted, huge profits were being made by former renters who bought their units at inside prices and then resold them. Called "flipping" The boards decided to impose the transfer fee and call it a flip tax on sellers to dissuade flipping.

Due to high oil costs, insurance, and increases is most expenses many buildings need to build their reserve fund and are trying to impose flip taxes. In order for the flip tax to pass 2/3 of the shareholders have to vote in favor of it. It requires a quorum. An absent vote is a no vote.

Condo and condop buildings have many investor owners from out of town making it difficult to pass.
There are several ways they try to impose the flip tax. There are arguments on both sides for every type. In my opinion none are good for sellers.

HDFC coops (a NYC affordable housing program) usually have a flip tax as a way to keep them affordable. HDFC coops were set up as a form of limited equity home ownership.

It is any easy way to get 2% sometimes 3% of a unit's sale price. The average apartment in Manhattan is over $1 million. Do the math. Buildings have figured 5-10 transfers a year what a nice windfall for them.
  1. A percentage usually 2% but sometimes 3%
  2. A flat fee
  3. Percent of profit
  4. Dollar amount per share
Management companies and boards lobby the shareholders why a flip tax is good. They argue if they have this reserve fund from the flip tax they won't have to raise maintenance or have assessments.

Elderly people planning on leaving the apartment to their children don't care as that is an exemption in many proprietary leases. People who recently bought and have to be relocated feel it's unfair as they have not been there that long. Long time residents feel they stuck it out and have already paid for all assessments over the years.

I prefer the dollar amount per share. A seller will always know their liability. The way the shares were allocated in the offering plan. So if you made renovations to your apartment and or hired a great real estate broker who sold for a higher price than other apartments with the same amount of shares you deserve that profit not the building. If the flip tax is based on profit then in my opinion the seller should be allowed to deduct the cost of capital improvements.

 
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