Maintaining the Economic Health of Your Co-Op by Instituting a “Flip-Tax”
A transfer fee, or “flip tax” as it is commonly called, is a revenue-producing measure utilized by many cooperative buildings. Typically, an owner pays a flip-tax fee to the building upon the sale of his or her unit. A flip tax allows the cooperative to generate extra income for the building, enhancing the reserve fund and alleviating annual maintenance and operations costs, without raising maintenance or imposing special assessments upon current owners.
A common initial hurdle to implementing a flip tax is obtaining the consent of two-thirds of the shareholders. Such a requirement is usually found in the By-Laws. Once the By-Laws are amended, an amendment to the Proprietary Lease is required. The New York Court of Appeals has ruled that a cooperative board could instate a flip tax only if this power was specifically stated in the proprietary lease (see Dan FeBland v. Two Trees Management Company and Thomas E. Kelly v. 330 West End Apartment Corporation). Therefore, to avoid running afoul of either statutory or case law, shareholders would vote, at a special meeting held for that purpose, to amend both the By-Laws and Proprietary Lease.
To maximize the likelihood of a favorable outcome, it is advisable that in advance of the meeting, the Board circulate a letter to the shareholders describing the amendment for the imposition of a flip tax, and why voting in favor the amendment would benefit shareholders. In addition, the letter could include possible options for calculating flip tax, giving shareholders the ability to vote on the method.
Flip tax can be calculated in a variety of ways. Below is an overview of some of the more popular methods. Note that from a management perspective, the simpler the flip tax formula, the easier it is to calculate and administer.
- Percentage of Purchase Price: Ordinarily, buildings charge between 1 and 3 percent of the sales price as a fee to the seller. A 2% flip tax is most commonly seen.
- Percentage of Profit: Flip tax may be calculated a percentage of the profit a seller stands to make on the apartment unit. The calculation can be based on gross profit- the difference between the unit’s original purchase price and the current sales price; or on net profit- the difference between the unit’s original price and the current sales price, but less renovation and closing costs.
- Flat Fee: A flat fee flip tax is administered as a standard fee and is imposed uniformly on all units regardless of the sale price of the unit.
An amendment to institute a flip tax can often be a hard sell, as shareholders are being asked to penalize themselves to financially support a building they are leaving. To rally support among shareholders, present the following factors for consideration:
- Financial information showing the building will be in much stronger financial shape with the institution of a flip tax, thus reducing the possibility of special assessments.
- Exemption from flip tax for shareholders already in contract to sell their unit at the time of the vote.
- Grace period of three to six months prior to the implementation of the flip tax.
- Declining scale based on length of ownership - for example, a reduced fee for a unit owner who has owned for longer than 15 years.
If you have questions about this post or any related matters, please feel free to contact me at dmroberts@norris-law.com.