May 18, 2013

Flip Tax | NYC Real Estate

Q: What is a Flip Tax
A:  A private Transfer Fee

The flip tax is a private 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 costs of operating and maintaining their buildings, many coops and condos need to build their reserve fund by either trying to impose a flip taxes or succeed at imposing a flip tax usually on seller's. In order for the flip tax to pass most bylaws/ proprietary leases require 2/3 of the shareholders have to vote in favor of it. It requires a quorum. An absent vote is a no vote.

A flip tax is a restrictive covenant All co-ops and 99% of Manhattan condos have restrictive covenants. "A provision in a deed limiting the use of the property and prohibiting certain uses".

Condo and condop buildings that have many investor owners from out of town make it difficult to pass a 2/3 majority if governing documents allow changes by vote.

HDFC coops (a NYC affordable housing program) usually have a flip tax as a way to keep the buildings affordable.

There are several ways they try to impose the flip tax. There are arguments on both sides for every type. It is any easy way to get 2% sometimes 3% - 5% 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 in my opinion is the fair way to determiner a flip tax.

If a seller made renovations to their apartment and or hired a great real estate broker who sold for a higher price than other comparable apartments with the same amount of shares, the seller deserves that profit not the building.

If the flip tax is based on profit, in my opinion it should be net profit not gross. The seller should be allowed to deduct the cost of renovations and capital improvements they made to their unit. After all the profit is because the owner increased the value of the shares by making the improvements. The coop should not be entitled to limit the seller's equity unless they contributed

Manhattan Seller


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