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Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

Betting on the Flip Tax

Ellen Kornfeld, vice president at the Lovett Group, has been managing a building on the edge. The board wants to redo the Upper West Side co-op’s elevators – but is waiting until its horse comes in. That “horse” is a transfer fee (aka flip tax) on a pending apartment sale in the property.

It’s not a new phenomenon, either. For the past few years, the co-op has been depending on income from its flip taxes to fund all of its much-needed capital improvements.

“We’ve done our roof that way; we’ve done our repointing that way,” Kornfeld notes. “At one point, when the market was very strong, we were making a fortune every year.”

Because the flip was drafted in the ’80s at conversion – and did not need shareholder approval – it contained an unusual feature. It was set at ten percent of the difference between the purchase and the sale prices. “A lot of these are original buyers of large apartments, which the owners bought as insiders at [comparatively] low prices,” she says. They have been reselling them at a huge profit. And the co-op has reaped the benefit.

That certainly made sense to the board of this co-op, Kornfeld notes, since they’ve got a 20-year self-amortizing mortgage, and they can’t keep going back to the bank to refinance. “They are very limited in their ability to accrue income. They don’t want to assess and they don’t want to raise maintenance.”

When the market was grand, funding with flips didn’t seem like such a bad thing. After all, the flip tax was a goose that kept laying golden eggs, a seemingly never-ending source of income that could then be applied to improve the property – and thus increase sales.

But when times are not so grand and are, in fact, actually bad, then whither the flip tax? And whither the boards who had counted on them?

Those boards, as the sales and flips dried up, were like an alcoholic going into rehab, learning the painful lesson that managers had long tried to drill into them. “The flip is gravy.” they would say, “and to depend on it in your annual budget planning would be like planning on funding your operations with money you hoped to win at the track.”

“A lot of boards use it to fill holes in the budget,” says Kornfeld. “I advise against that. They think the income will be regular. But you can’t count on it.”

Boards listen, right? They learned right?

Perhaps. Some managers say that any improvement in the sales market, bringing with it new flip tax revenues, will be the test. And that test may be here now. Some market insiders see signs of improvement in the market, as a handful of attorneys, brokers, and managers report that, in Manhattan, at least, they have seen a slight uptick in sales.

“Since the beginning of 2009, there has been a marked improvement in the residential brokerage market,” says Manhattan-based manager Don Levy, a senior vice president at Brown Harris Stevens. “There had been a tremendous drop-off in sales activity in the previous year.”

Adds attorney Bruce Cholst, a partner in Rosen Livingston & Cholst: “My firm serves as transfer agent for roughly 40 co-ops, and we’ve seen a huge bump in sales in June and July.” In his own co-op, Cholst reports seven sales since Memorial Day.

“There’s a lot of offer activity out there, where it was just dead before,” observes Miriam Sirota, a broker with Brown Harris Stevens. “The rates have dropped significantly. I think people had to become comfortable with the new economy, and many had been looking for a long time and now have an idea of what they’d like to buy.”

(In Brooklyn and Queens, however, two veteran management executives, Marc Kurs, president, TKR Property Services, in Brooklyn, and Steve Greenbaum, director of management at Mark Greenberg Realty, in Queens, report that sales in those boroughs are flat. Lynn Whiting, the director of Management at Argo, asserts that both Manhattan and Queens sales have not risen consistently enough to label increased sales a trend.)

And board reaction? Will the members stay “on the wagon” and no longer count on flip tax revenue as a steady income source? “If they had counted on flips, when the market goes dead, they’ll find that they’ve painted themselves into a bad financial corner,” says Gerard J. Picaso, president of Gerard J. Picaso Inc., a management firm. “Will boards learn their lesson from this experience? Some listen to the warnings, some don’t. It’s like anything else. It depends on the boards.”

Place your bets, please.

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