September 3rd 2010
The New York Times
FLIP taxes have long been a necessary evil of co-op sales in New York. The fees, often imposed by co-op boards as a percentage of either the selling price or profit, have generally been borne by sellers. But now, in a weaker real estate market, there are signs that more buyers are being asked to shoulder the burden.
“A sale is less complicated when the flip tax is paid by the seller,” said June Gottlieb, an associate broker and senior managing director at Warburg Realty. “If it’s paid by the buyer, it’s an emotionally more complicated transaction.”
For the most part, buildings that impose flip taxes do not care who pays the fee, so long as it gets paid and goes into their coffers, though many these days are stipulating the fees are the buyer’s responsibility.
Lisa Breier Urban, a managing partner with the law firm Breier Deutschmeister Urban & Fromme in Manhattan, said that stipulating the buyer must pay the flip tax could be a way to help sellers out in a slow market.
“Typically, if you know you’re going to have to pay 2 percent out of pocket as a seller, you’re going to add that into your asking price,” Ms. Urban said. “This way, sellers can keep their asking price a little lower, and the flip tax becomes a buyer payment.”
Flip taxes were first imposed in New York City in the late 1970s, when many buildings were converting to co-ops, and residents were induced to buy their units with artificially low purchase prices, said Arthur I. Weinstein, a co-op lawyer in Manhattan who serves as vice president of the Council of New York Cooperatives and Condominiums.
Flip taxes were created in case the buyers turned around and resold the units for huge profits. A fee amounting to a percentage of the seller’s profits would ensure money in the reserve fund and a healthy building for those people who bought and stayed, Mr. Weinstein said.
More than three decades later, a more appropriate term for flip taxes is “transfer fees,” he said. And those fees, which now exist simply to replenish a co-op’s reserves, come in many forms. One flip tax commonly seen is a percentage, generally 2 to 5 percent, of the gross proceeds of the sale. Another is a fixed fee based on a number of dollars for each share in the apartment being sold.
“The original flip taxes — and many which still exist today — were based on a percentage of net profit, and that could be very substantial,” Mr. Weinstein said.
Until recently, it was unclear whether condominiums could legally charge flip taxes, but “that question has been answered in the affirmative, so some condominiums are now, late in the game, instituting flip taxes,” Mr. Weinstein said.
Traditionally, if a building did stipulate in its bylaws who was to pay the flip taxes, it was the seller, he said. Nowadays, since flip taxes have nothing to do with fears of apartment-flipping, a building may stipulate that buyers must pay the flip tax, which can make adopting the fee or increasing it more appealing to shareholders, Mr. Weinstein said.
“You need a supermajority — that is, more than 50 percent, either two-thirds or three-quarters of shareholders — to approve a flip tax,” he said. “That political benefit of saying, ‘You’re not paying it, the buyer is paying it’ might ease the passage.”
In August, the Federal Housing Finance Agency proposed a rule that would prohibit Fannie Mae and other agencies from buying loans in buildings with flip taxes. The proposal is largely intended to discourage developers from imposing covenants that would require buyers to pay them a flip tax when a home is sold for as long as 99 years, according to the Real Estate Board of New York.
It is currently undergoing public review, and has evoked a quick — and negative — response from New York’s real estate industry. Michael Slattery, the New York board’s senior vice president, said its membership was organizing to oppose the proposal as written, though, he said, “We’re not unsympathetic to what they’re intending to do.”
As part of public comment, he said, “we’ll try to convey the experience in New York and how it’s different from the experience they’re concerned about.”
Whether a building’s bylaws stipulate who pays or not, the party who actually hands over the money is typically determined through negotiation, said Aaron Shmulewitz, a partner with the real estate law firm Belkin Burden Wenig & Goldman. Even so, he said, “in the vast majority of cases, the purchase price is adjusted in some fashion to reflect who pays the flip tax.”
Ms. Gottlieb, who has clients in several buildings that stipulate the buyer pays, such as 860 and 870 United Nations Plaza, said that payment of the flip tax was a matter of “semantics.”
“If it’s paid by the buyer, they factor that into their offer,” she said. One truism for brokers is that neither buyers nor sellers want to pay it twice on an apartment, added Nikki Field, a senior vice president with Sotheby’s International Realty.
“Sellers figure if they paid it on the way in, they don’t want to pay it on the way out,” Ms. Field said. In today’s market it makes sense for buyers to pay the flip tax, as they ultimately benefit from the building’s strong reserves, Ms. Field said. She also noted that flip-tax revenue had lessened in a slowing market, and that her lawyers had found the reserves in some buildings seriously depleted.
“What are they doing to make up for that?” she asked. “They’ll have an assessment or they’ll raise their common charges or maintenance fees.”