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Our co-op board wants to change the flip tax to increase the building’s reserve funds. What do we need to consider?

“The hardest part of implementing or amending a flip tax is getting shareholder approval,” says Bonnie Reid Berkow, a real estate attorney at Adam Leitman Bailey, P.C. with decades of experience representing co-ops and condos in New York City. That’s because if any shareholder is considering selling in the relatively near future, they’ll be hesitant to approve a change that would take money out of their pocket, regardless of how attractive it might be for the building.

A flip tax—more accurately a transfer fee—requires an official amendment to the building’s proprietary lease. It is also recommended you amend the by-laws, unless the by-laws already contain language authorizing the board to impose this type of fee. Amending the by-laws and proprietary lease generally requires a vote of at least two-thirds of the outstanding shares which is difficult to achieve.

There are many ways of calculating a flip tax. It can be a flat fee, based on share ownership, or based on percentage of sale price. Most buildings in New York who have a flip tax are in the range of one to five percent of gross sales price, with two or three percent being the most common.

A building that has a flip tax based on a flat fee per share may be losing the ability to generate significant income. Berkow says she has recently been working with a co-op where the fee outlined in the proprietary lease was just $25 per share. 

“The building was getting a few thousand dollars per sale but the co-op wanted a fee that was more in line with current market conditions and would raise more money for the building,” she says.

There are several strategies that can help make it easier to persuade shareholders of the merits of a flip tax.

Exempting current shareholders

One approach to successfully implementing an increase in flip tax is to exempt anyone who is a shareholder on the date the amendment is implemented, which could include the surviving spouse or estate of a person who owned the shares on that date. “This is probably the most effective way to get shareholder buy-in on the amendment,” Berkow says.

This was the path chosen recently by the co-op Berkow was advising. The co-op already had enabling language in the by-laws to implement the flip tax but it needed shareholder approval to increase the amount from a flat fee per share to a percentage of the sale price. They were able to get almost unanimous approval by making the increased flip tax applicable only to future shareholders.

Anyone who was a shareholder on the effective date of the amendment would pay only the lower amount. While this change did not result in any immediate income gains for the building, the board was looking at a long-term strategy that would result in more money being generated for the co-op over time as apartments changed hands.

Exempting shareholders who sell at a loss

Another exemption to consider might be any shareholder who sells at a loss. If the transfer fee is based on a percentage of sale price, a shareholder who is worried about having to sell at a loss would not be likely to approve the amendment.

Rewarding long term shareholders

Another option is to calculate the flip tax on a sliding scale based on the length of ownership—so the longer a resident has held shares in the co-op, the lower their flip tax would be on an eventual sale.

“Sometimes having a sliding scale helps convince long-time shareholders to vote in favor of the flip tax,” Berkow says.

Giving shareholders the opportunity to haggle

Flip taxes are a frequent point of negotiations in sales and present another way to sweeten the deal: The board can 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.

“The provisions should be clear, as the standard contract of sale provides that the flip tax is paid according to the co-op’s policy,” Berkow says.

Establishing a range for the flip tax

Berkow recommends “enabling language” in the flip tax amendment stating that the board is authorized to impose a flip tax within a range between certain percentages or up to a certain percentage.  “This gives the board the discretion to start at a lower percentage increase the percentage over time without having to go through the onerous process of getting shareholder approval,” Berkow says.

Communicating the changes

Once you have an amendment drafted, the board needs to let shareholders know about the change well in advance of its implementation. “The best option is to circulate a written description of the proposed flip tax, including the reasons for adopting it and any special capital projects that need to be addressed,” Berkow says.

This is your opportunity to lobby for the change. You might consider including 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 standard flip tax rate and how your building’s 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.

You can follow this up with an information meeting. “I’d recommend 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,” Berkow says.

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 get objections from shareholders who have sales pending or in contract.

Once the flip tax has been successfully voted in, you need to circulate copies of the resolution and the amendments to the bylaws and proprietary lease, in accordance with whatever notice provisions are set out in those documents. “Affidavits confirming that those amendments were sent out in accordance with building requirements should be executed, and kept in the co-op’s records,” Berkow says.

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.

Additional provisions to consider

It’s a good idea to define the sales price in the amendment so it’s clear that it is the price for the transfer of shares and assignment of the proprietary lease in the contract of sale. The amendment implementing the new flip tax can also contain a provision in case the board finds the contract of sale does not reflect the total consideration. In this case the fair market value of the shares would be determined by an independent appraisal at the shareholder’s expense.

“This type of language would prevent a shareholder from cheating and, for example, including built-ins or furnishings in a separate side agreement so that the sale price in the contract of sale is artificially lowered,” Berkow says.

The enabling language of the amendment could also require the seller to sign an affidavit confirming the amount of the sale price.

“Having a flip tax for your building is a long term, forward-looking strategy and should definitely be considered in connection with budgetary planning to help avoid large future maintenance increases or assessments.” Berkow says.

Read the original article here.

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