The "Flip Tax" Creative Financing or a Coop Cop Out ?

By
Real Estate Broker with The Corcoran Group

The flip tax is a transfer fee that many new york coops and condos impose on shareholders and owners. In the 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 disuade flipping.

Due to high oil costs, insurance particularly terrorist insurance, neccessary repairs and increases in 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 quarum. An absent vote is a no vote. Condop buildings often have investor owners from out of town.

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. In my opinion it is better to help pay the buildings expenses when you live there and can enjoy the improvements and not when you sell. Why should a seller give a going away present to the coop because the coop is not fiscally disiplined.

It is an 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. Tax per share  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 asessments. Elederly people  planning on leaving the apartment to their children don't care as that is an exemption. 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 assesments over the years.

The only real fair way I beleive is per share. The way the shares were allocated in the offering plan. So if you made renovations to improve 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.

Buildings need to be managed better. There are so many ways to cut back. Boards should be more accountable to shareholders. Costly mistakes the board made on renovations, refinancing at high rates with prepayment penalties etc. should not be the resposibility of a seller. 

  Flip Tax, Updates and related posts

flip tax: REBNY (Real Estate Board of New York) Saves Flip Tax - 02/02/11
flip tax: Manhattan Real Estate Q&A: What is a Restrictive Covenant? - 01/08/11
flip tax: Real Estate and Politics is LOCAL: In New York It's Called A "Flip Tax" - 10/27/10

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Location:
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Tags:
flip tax
coops
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Comments 28 New Comment

Rainmaker
498,952
Mitchell J Hall
Lic Associate RE Broker - Manhattan, NYC
The Corcoran Group

Hi Joe,

It depends what is in the coop proprietary lease and by/laws. Usually a shareholder majority is needed to impose a flip tax. However your building is HDFC and already had a flip tax so depending on the language in the proprietary lease and by laws they may be allowed to change the amount without shareholder approval.

Read the coop documents: proprietary lease, by laws and the offering plan to find out if the board can raise the flip tax without shareholder approval. Board members are not necessarily attorneys or real estate professionals. There is no specific training to become a board member.

The shareholders have recourse if the board or any member is violating the by laws. It is usually spelled out how much discretionary power the board has. Board members have a fiduciary duty to the shareholders. The coop must need the revenue.

Good luck. Let me know if you need help selling.

September 03, 2010 10:08 AM
Anonymous #25
Anonymous
Erik

Mitchell, 

My wife and I (young couple) are considering buying a Manhattan HDFC (west harlem) 1BR for 120k. We qualify to buy it now, based on our income, but won't qualify in less than 2 years because we will have higher income. Anyway, the co-op has a 70/30 flip tax (30% of profit from sale to go to building) when you sell the unit. monthly fees are really low.

We know that we will be here for at least the next 7 years. To say that we will still be here in the area after that is too speculative (we want to stay, but how do we know? it based on jobs). We could sell the unit or hang on, but the building laws say this flip tax is in affect for the next 20 years.

We see this place as a place to "live," not invest. We could "live" in many other places in the city by paying higher monthly rent. But we do qualify. Should we be worrying about the flip tax or just accept it? I can't get a straight answer of the negative or positive about this flip tax.

Thank you,

Erik

 

 

 

May 10, 2011 11:15 PM
Rainmaker
498,952
Mitchell J Hall
Lic Associate RE Broker - Manhattan, NYC
The Corcoran Group

Hi Erik,

Since I wrote this post five years ago, I have sold many coops with flip taxes including HDFC coops. I'm no longer opposed to them particularly in HDFC coops. In an HDFC coop you are buying the apartment at a below market price with low maintenance that includes reduced taxes. In return, when you sell within 20 years you give back a portion of your profit ("limited equity") back to to the coop. The coop uses that money for repairs and improvements to the building.

Keep in mind the 70/30 is on the net profit not the sale price. You should be able to deduct any capital improvements or renovations. So if you sell it for $220,000 you pay the coop 30% of $100,000 less any renovation costs. If you spent $75,000 in renovations than you would pay 30% of $25,000 or $7500. It really is a good deal even better if you stay 20 years. You get affordable housing plus 70% of the equity when you sell.

I hope you're working with an experienced buyer's agent. The listing agent represents the seller's interests. They are required to have you sign an agency disclosure form that acknowledges they represent the seller and in NY state buyers are entitled to have their own agent representing their interests. The seller pays the broker fee.

Feel free to call me at (917) 312-0924 if you have any questions or if you would like to have an agent represent your interests in the transaction.

Best,

Mitchell

 

May 11, 2011 12:33 AM
Anonymous #27
Anonymous
Erik

Dear Mitchell,

Thank you for reply. True, It may be a 5 year-old post but it's the first thing that pops up in a targeted and informative Google search, so it is does help.

 I clarified with the seller on these points; their response was a little different. I want to provide it here in-case others are curious when they have questions, too.  Seller's response:

"The Flip tax is in place for a period of 30 years (until 2036)  I do not believe individual apartment renovations play into the flip tax.  The definition of 'Profits' as defined in Article XV, Sect 2 our Prop lease: "Resale Profits" shall mean (i) the gross sales for such sale, less (ii) the sum of the consideration paid by such shareholder when purchasing the unit plus special assessments for building wide improvements.
So, (Resale price) - (original purchase price + Building Wide Assessments)= PROFIT
Your example, (220,000) - (120,000 + special assessments charged to individual shareholders for building improvements)= 100,000
The costs of building wide improvements or capital improvement such as new roof, boiler, etc are sometimes passed down to the shareholders.  Since our finances are good we have absorbed all such costs."

So, in this case we're still getting affordable housing plus a small return on equity that is still substantial, right?
What do these types of co-ops do  after the flip-tax expires ( in this case, what happens after 2036)?

We stumbled upon this HDFC without a broker and the co-op board is the seller; thus, no buying agents have been involved, just lawyers. Can a buying agent help at this point?

May 13, 2011 02:14 PM
Rainmaker
498,952
Mitchell J Hall
Lic Associate RE Broker - Manhattan, NYC
The Corcoran Group

Hi Erik,

I love Google!

Every HDFC coop is different. There are good ones and bad ones. Ones that are run well and ones that aren't. Board members don't necessarily have to have any special training, skills or real estate knowledge in order to become a board member.

$120,000 is obviously a good price for a Manhattan apartment. Your lawyer needs to do "due diligence". Usually the longer the HDFC coop has been established the better it is for a purchaser because they have a track record. This coop may have recently been established.

30% of the gross profit is not that unusual for a newer HDFC coops. Hopefully they already renovated the apartment before selling it to you. HDFC coops that have a flip tax based on net profit rather than gross profit encourage shareholders to renovate, upgrade and increase the value of the apartment.

If the apartment needs work in order to be livable and you have to invest in it, in my opinion then it is not in your best interest that the coop shares in that portion of the profit since they had nothing to do with it. In my opinion it should be in move-in-condition before purchasing in a coop with a 30% flip tax on gross profit.

It is possible that there have not been any resales in this coop yet therefore they may need to impose assessments for repairs. But they are saying their finances are good so they have absorbed these costs. Good finances are important.

Most HDFC coops were set up in 70's and 80's when landlords abandoned buildings, the city took over the buildings and then sold the building back to the tenants for practically nothing. When those original insider shareholders sell is when the coop really benefits from the flip tax.

Not all HDFC coops currently have flip taxes. The more "restrictive covenants" the harder it will be to sell. Some HDFC coops can not obtain financing through banks.

The bottom line is you like the apartment. It is affordable, you will be able to live there and keep 70% of your equity when you sell. In my opinion it should be in move-in-condition. Your lawyer should advise you of the pros and cons and of any obstacles and challenges you may have selling it.

After 2036 anything can happen. They will either have a huge reserve fund from collecting the "flip tax" from resales or they may choose to continue the flip tax or choose to no longer be an HDFC coop. However, a majority of shareholder votes is usually required to make changes to the Prop lease.

Good luck!

 

May 14, 2011 09:11 AM
Rainmaker
498,952

Mitchell J Hall

Lic Associate RE Broker - Manhattan, NYC
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