February 4th 2011
The Real Deal
REBNY President Steven Spinola, Rep. Anthony Weiner, Warburg President Frederick Peters, Elaine Mayers of Citi Habitats and Stacey Max of Bellmarc Realty
Tuesday’s approval of an amendment to a proposed Federal Housing Finance Agency ruling dealing with flip taxes could keep lenders from abandoning the New York City residential market in the future, according to industry experts.
The amendment pared down an earlier FHFA provision, announced in fall 2010, which would have barred government-sponsored Fannie Mae and Freddie Mac from lending in all multi-family buildings in which a flip tax is written into the contract. In its original form, the proposal could have adversely affected roughly 50 percent of the New York City residential stock, according to Real Estate Board of New York President Steven Spinola.
The amendment was passed as part of a larger proposal that is still winding its way through the approval process.
Flip taxes are commonly written into New York City co-op or condo contracts as a source revenue for buildings. The FHFA proposal targets developers who use flip taxes to receive payouts long after they part ways with a property. But critics said it unfairly lumped in New York City practices with those of unscrupulous builders in other parts of the country, according to industry experts.
Had the original proposal remained intact, it would have had catastrophic consequences for New York City’s residential market, Spinola said, because it would have severely limited the amount of credit available to buyers.
“Banks basically look to Fannie and Freddie to buy mortgages back,” Spinola explained, noting that with those two organizations barred, banks would have backed away from lending to many co-ops and condos.
Frederick Peters, president of Warburg Realty, agreed that, had the ruling been approved in its previous form, it would have been detrimental to the city.
“In New York, where flip taxes generate so much of the revenue buildings use for capital projects and major repairs, the proposed legislation had the potential to deal a huge blow both to expenditures needed to keep our housing stock up to date and to the value of apartments in buildings with flip taxes,” Peters said.
There is no word yet on when the broader proposal could take effect, if approved. Much like a rider on a pending bill, the amendment affects an FHFA ruling that has not yet been approved.
Elaine Mayers, a residential sales agent and senior vice president with Citi Habitats, said she wrote letters to her local representatives in support of the amendment — championed by Rep. Anthony Weiner and REBNY — because she felt the ruling didn’t properly distinguish New York City flip taxes from those in other parts of the country.
“Everyplace else, that money goes back to the developer,” Mayers said. “Here it goes back into the co-op or condo coffers so it can be used for the building. [The ruling] would have tied the hands of people who were getting mortgages in Manhattan.”
Shortly after FHFA first announced its proposal, Weiner and REBNY launched a campaign to exempt buildings in which the flip tax is associated with private transfer fees to homeowner associations as well as co-op and condo boards.
“There was a practice around the country… in which developers had put into their initial contract of sale [that with] any resale of that building a fee would be paid to the original developer,” Spinola said. “We made the distinction between a fee going back to a developer versus a fee determined by the existing property owners that would go back into the building.”
That distinction is crucial for the New York City residential market, according to Weiner, whose district includes portions of Brooklyn and Queens.
“I don’t know if a ban of flip taxes would have been a dealbreaker [for banks], but it certainly would have cooled the market a great deal,” Weiner said. “[The amendment] shouldn’t lead them now to avoid financing co-op and condo owners.”
Stacey Max, an executive vice president with Bellmarc Realty, said the flip tax amendment will keep New York City mortgages attractive to lenders, should the overall proposal pass.
“[Fannie and Freddie represent] the only secondary market that there is,” Max said. “Unless a bank is willing to hold a loan on its books, Fannie Mae and Freddie Mac are their only option.”
And while the FHFA flip tax mandate hasn’t yet gone into effect, Spinola said that the adopted amendment is a coup for the city’s residential industry.
“It’s a very big victory for co-op and condo owners throughout the city,” Spinola said.