Sunday, March 18, 2007

Flip Taxes: A Pox on Sellers' Profits

New York Times
March 18, 2007
Your Home

NEXT to a proposal to redecorate the lobby, the surest way to get a co-op or condo building buzzing is for the board to propose a flip tax.

Also known as a transfer fee, a flip tax is an amount of money paid to the building upon the sale of an apartment, usually by the seller but occasionally by the buyer. Although flip taxes are almost always imposed as a way of avoiding a buildingwide assessment or an increase in monthly maintenance or common charges, they are never very popular with apartment owners.

"It seems that more and more buildings are considering imposing them," said Bruce A. Cholst, a Manhattan co-op and condo lawyer. "And I think the reason is because many buildings are getting hit hard by Local Law 11 facade work, energy costs and increases in basic operating costs."

Since a building that needs money will have to raise it somehow, Mr. Cholst said, many boards feel more comfortable collecting it from people who are leaving than from those who are staying.

"It never ceases to amaze me how many people oppose flip taxes," he added. "I just helped push one through in my own building. And people said they were opposed to it because it was fundamentally unfair to people who were leaving the building. That was the one argument I least expected to encounter."

Richard Siegler, a Manhattan co-op and condo lawyer, said flip taxes were originally designed to allow a building to share in profits made by residents who bought their apartments at low "insider" prices and then quickly sold them.

The imposition of flip taxes was initially restricted by the courts. In the early 1980s, Mr. Siegler said, they invalidated flip taxes imposed by co-op boards on their own without specific authority under the proprietary leases or offering plans.

The courts also objected to flip taxes that were not imposed on a proportionate per-share basis, because the Business Corporation Law requires equal treatment of shareholders owning the same class of stock.

In July 1986, however, the New York State Legislature acted on a proposal from the Council of New York Cooperatives and Condominiums and defined what would, and would not, be allowed.

Arthur I. Weinstein, a vice president of the council, said that as a result, a flip tax can be imposed by a building's board without having to obtain the approval of the shareholders if the authority is provided in the proprietary lease or offering plan.

(If neither document contains such authority, he said, a flip tax can be imposed only if the proprietary lease is amended. Typically, that requires a vote of a "supermajority" of shareholders — two-thirds or three-quarters of the outstanding shares.)

Dennis H. Greenstein, a Manhattan co-op lawyer who was an assistant attorney general in the real estate finance section, said the law specifically allows co-ops to impose flip taxes that have an unequal effect on owners holding an identical number of shares.

As a result, he said, the amount of a flip tax can be determined in any number of ways. It can be a flat fee, or it can be calculated as a dollar amount based on the number of shares allocated to the apartment by the co-op corporation or as a percentage of the sale price or net profit.

Flip taxes can also be based upon the length of time the seller has owned the apartment, with higher fees typically being imposed on those who have owned their apartments for shorter time periods. (Sponsors and investors who are "holders of unsold shares" are usually exempt.)

Mr. Greenstein added that a number of recent court decisions seem to indicate the courts will allow flip taxes to be imposed in condominiums. But to do that, the condo would probably have to amend its bylaws.

Illustration by Tom Bloom

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