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Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

Read My Lips: More New (Flip) Taxes

Frederica Gamble
Board President, 242 East 19th street owners corp.

When 242 east 19th street became a co-op in 1984, a flip tax of $10 a share was put in place. It was a flat fee and fixed. Throughout the 1990s and into the 2000s, even as real-estate prices soared and apartments in our building sold well, the money earned from our flip tax did not rise. In fact, thanks to inflation, it actually declined. Indeed: by 2005, our flip tax, eroded by more than two decades of inflation, was now worth only half its original value: from $10 a share, it was the equivalent of $5.40 a share. Meanwhile, our reserve fund was drying up.

The solution seemed obvious: our flip tax had to increase. Nevertheless, some of our longtime board members, and even our managing agent, were convinced that increasing our flip was nearly impossible. Among other problems, the change required approval from at least two-thirds of all shareholders. But based on precedent, we’d be lucky to get even half the building to vote. And of those who did, how many would agree to higher taxes?

I quickly discovered that convincing shareholders wasn’t the only challenge; a few board members too were skeptical of a higher flip. Some didn’t believe there was any way we could gather the required votes from shareholders. Others, considering a possible sale of their own apartments, did not want a larger tax in their personal future.

The more I learned, the more concerned I became. Yet, if understanding how our flip tax was harming the building had persuaded me that we must make a change, why wouldn’t my neighbors feel the same way? I was convinced that presented with the right information, most would back a higher flip tax.

With the help of real estate brokers and managing agents, a small board committee gathered information on the flip taxes in more than 100 Manhattan buildings, concentrating on co-ops in our neighborhood. We soon had evidence demonstrating that the vast majority of co-ops had flips expressed as a percentage of sales price (as opposed to our building’s flat per-share tax). More: the average flip tax in comparable co-ops was between two and three percent of the sales price.

When we presented this information at the next board meeting, it was widely agreed that increasing our flip was in the building’s best interest. Then, intentionally pricing ourselves at the low end of comparable co-ops, we settled on a tax of 1.5 percent of a sales price. A minority of board members remained unconvinced, however, but agreed to go along with the majority. (One member, dead set against the increased flip tax, recused herself from further participation.)

The next step was reaching out to shareholders. It was important to present our case in plain English and to be forthright about the financial challenges facing the building if the flip tax remained unchanged. Over the next two months, we put together a package of materials: a brief letter setting forth our recommendation; a chart showing flip taxes for comparable co-ops; and a list of “Frequently Asked Questions” (What is a flip tax? How is it currently calculated? What is the money used for? Why make the change? What does my monthly maintenance cover? What do other buildings do?).

We were confident that if people understood, they would overwhelmingly vote in favor, so our chief objective was to gather every vote – regardless of how it was cast. “The decision is yours,” we wrote to the shareholders, “but we ask that everyone cast a vote.”

To prevent shareholders from simply ignoring the material, each Board member was given responsibility for about 15 shareholders. We e-mailed, called, and knocked on doors, gently reminding shareholders to vote, offering to answer questions, and presenting our rationale for the higher flip tax. We hosted two information meetings. Finally, we mailed and re-mailed proxies to shareholders who had not been responsive. Despite our persistence, ours was a soft sell: in each conversation we emphasized that we were not pressuring the shareholders, just explaining why we thought the change was for the good.

In federal elections, only about half the U.S. adult population actually turns out to vote. At our building, we’re proud to say that a remarkable 90 percent of shareholders came out to vote on whether to increase our building’s flip tax to 1.5 percent of an apartment’s sale price. As for the amendment itself, it was approved resoundingly, with 86 percent voting “yes.” Case closed, happy ending, good triumphs.

That’s not quite the end, however. The epilogue to this tale is that, in the past two years under the new formula, the building’s flip-tax revenue has been three times greater than it would have been under the old formula. What really counts, of course, is that we’ve put in place a much-needed financial cushion for our reserve fund. And that’s the kind of news that every owner wants to hear.

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