Vanderbilt Propery Management : Finance

THE BIG PICTURE

Whether you call it a flip tax or a transfer fee, there are a lot of misconceptions about this tax. It should actually be called a transfer tax since it is imposed on a shareholder when he transfers his corporate shares to another person. It became known as a flip tax long ago, when buyers would purchase the shares in an apartment and then resell them for a higher price, “flipping” them, so to speak. The tax benefits a building because the money paid to the co-op generally goes into the reserve account or working capital account to fund projects.

BE SMART

If you are on a board that is considering instituting a flip tax, remember that generally a two-thirds majority vote of the shareholders is required. Therefore, the board has to be very methodical, and even then you’re not assured of success. In one of our buildings, the board sent out a survey to the shareholders to gauge interest. They held a shareholders meeting where the board treasurer presented graphs and charts explaining the benefits of a flip. He pointed out that if the building had a flip tax during the previous seven years, it would have been able to pay the $250,000 needed for the upcoming elevator project. Without the flip tax, assessments were needed.

This board also presented information from local brokers about what other buildings did concerning flip taxes. We spoke at the annual meeting, explaining that the majority of our buildings had a flip tax anywhere from 1 to 4 percent of the purchase price. We explained that the flip can be structured in many different ways: some people do a dollar amount per share, while others use a percentage of the purchase price. Even though it’s usually at the seller’s expense, we informed the group that it can also be negotiated between the buyer and seller, and brokers need to know this. There can also be carve-outs so that if a shareholder wants to give the apartment to an immediate family member, there is no flip.

At this co-op, despite all the work the board did, they didn’t get the required two-thirds majority vote. My guess is that a lot of shareholders were thinking of selling and didn’t want this to affect their sales. Another board will probably try again. If you do it right, you can generate a pile of cash – and for tightly budgeted co-ops with increasing costs, that’s not something to be ignored.