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How should a co-op handle a change to the flip tax policy?

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Question:

Our co-op board is considering a new flip tax in order to build up the building's reserve funds. What do we need to consider before we make a move?

Answer:

If you’re hoping to institute a “flip tax” in your building (also sometimes known as a “transfer fee,”), your board will need to carefully follow the building’s bylaws, and to make the new fee palatable to shareholders, says Steven Wagner, a co-op and condo attorney with Wagner Berkow LLP and a longtime board member of his own 420-unit Manhattan co-op. 

“The addition of a flip tax requires an official amendment to the building’s by-laws as well as the proprietary lease,” says Wagner. “As with any amendment of the by-laws, you’ll need a majority vote from shareholders.” (While it's likely enough to just amend the proprietary lease, to protect against changing laws or future legal challenges, Wagner considers it a best practice for boards to amend the by-laws, as well.)

But before you get there, your board should consider drafting the new flip tax rules to appeal to shareholders as much as possible. “There are a few options available in crafting the flip tax that will help make it easier to pass,” says Wagner.

  • SET UP A SMART FEE STRUCTURE. While there are a number of possible ways that a flip tax can be calculated, Wagner recommends  that the fee be determined either on a per-share basis, or as a percentage of the gross sale price as indicated in the contract. “Most flip tax calculations range from one percent to five percent of gross sale price or more, with 2 percent or 3 percent being the most common,” Wagner adds.
  • REWARD LONGTIME RESIDENTS. Fees can also be calculated using a sliding scale based on the length of ownership, meaning that the longer a shareholder owned their apartment, the lower their flip tax would be on an eventual sale. “Sometimes having a sliding scale helps convince longtime shareholders to vote in favor of the flip tax,” Wagner notes.
  • CLARIFY THE POLICY FOR FAMILIES. It’s also helpful to clarify in the amendment that the fee won’t be imposed on transfers between spouses, family members or to a trust for estate planning purposes, when no actual sale has taken place.
  • GIVE SHAREHOLDERS ROOM TO HAGGLE. Another way to sweeten the deal: include a provision in the amendment clarifying that while the flip tax will be imposed on the seller, they’ll have the option to shift some or all of that fee to the buyer. (Flip taxes are a frequent point of negotiations in sales.) “The provisions about shifting payment of the flip tax from seller to purchaser should be clear, as the standard contract of sale provides that the flip tax is paid according to the co-op’s policy,” says Wagner.

As for provisions that will protect the co-op, Wagner recommends “enabling language” in the flip tax amendment stating that the amount of flip tax to be imposed may be in a range between certain percentages, with option to make the percentage lower or higher. This would allow future changes to the calculation of the flip tax, without the onerous process of getting a new amendment approved.

“That amount can be adjusted from time to time by simple majority vote of the shareholders or the board, within the range authorized in the enabling language,” says Wagner.

And in order for your board to accurately assess the amount of flip tax based on a fully executed sales contract, it’s a good idea that the amendment require a form of affidavit confirming the amount of the sale.

One more thing to consider: if your building has any apartments owned by the sponsor or a successor holder of unsold shares, check the bylaws to see if their approval is required to move forward with the flip tax amendment.

Once you have a satisfactory amendment drafted,  the board should inform shareholders well in advance of the proposed adoption of the rules. “We recommend circulating a written description of the proposed flip tax, including the reasons for adopting it and any special capital projects that need to be addressed,” says Wagner. “Items to consider in this written disclosure include the projected income based upon past sales; the amounts that would have been in the reserve funds had the flip tax been imposed earlier; the typical amount of the flip tax (i.e. two percent to three percent) and how the proposed flip tax compares; how improved financials would make the co-op more attractive to prospective purchasers; and how alternatives for fundraising such as assessments or refinancing will be moderated or eliminated by the flip tax.”

This written notice should be followed up by an information meeting, and Wagner recommends holding the vote on the flip tax at a special meeting rather than the annual meeting, so you have adequate time to devote to discussion and the voting process.

It’s standard to include a grace period of around six months between the vote and the implementation of the flip tax, in order to give shareholders a reasonable opportunity to sell, and not garner objections from shareholders who have sales currently in process.

Once the flip tax has been successfully voted in, says Wagner, the board should circulate copies of the resolution and the amendments to the by-laws and proprietary lease, in accordance with whatever notice provisions are set out in those documents. And affidavits confirming that those amendments were sent out in accordance with building requirements should be executed, and kept in the co-op’s records.

It can be difficult enough to get a new flip tax passed, without running the risk that a shareholder may come back and try to challenge it after the fact.

 


New York City real estate attorney Steven Wagner is a founding partner of Wagner | Berkow with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders.  To submit a question for this column, click here. To ask about a legal consultation, send an email or call 646-791-2083.

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