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Flip taxJul 17, 2007


Our board has been talking about a flip tax.

My question is must the board bring this kind of decision to a vote of all the shareholders gaining a 2/3 super majority or can they vote on it themselves?

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Enacting a flip tax - BP Jul 18, 2007


The only legal way to enact a flip tax is by amending the Proprietary Lease. It typically requires a majority of all outstanding shares to pass it but some buildings require a super-majority.

Your coop attorney should check your governing documents to see what your building requires, and you should NOT proceed with trying to enact it without the help of your attorney.

You have to decide what type of flip tax you want. It can be per-share, flat fee, % of sale price, % of net profit, or a combination of types. The type may make a difference. For ex, Shs may vote yes if it's per-share but vote no if it's a % of the sale price and leaves open the possibility that the board can raise the % at any time in the future.

You have to plan carefully and do a good "selling" job to all your Shs to convince them of the benefits of a flip tax. Check Habitat and The Cooperator for articles on flip tax - also the Council for NY Cooperatives & Condominiums (www.cnyc.com) <-- they have a good article explaining the history of the flip tax, the types, how to "sell" it, etc.

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> Join the conversation Comments (2)
Flip Tax - V Jul 19, 2007


Our mistake was relying on a "super majority" rather than a simple majority of 51% or more of the shareholders. The flip tax did not pass. Yes I believe we do need to change the proprietary lease. Do you need shareholders' approval to change the proprietary lease or not?

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> Join the conversation Comments (1)
Shareholder vote a must - Steve Jul 19, 2007


Yes, V, you must get the approval of shareholders to change your proprietary lease. The terms for doings so are written inside it. Or you can ask your corporate counsel.

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> Join the conversation Comments (2)
Flip tax - V Jul 20, 2007


Approximately one-third of the shareholders did not vote either way on the flip tax. Any ideas on how to get them to vote in the future?

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> Join the conversation Comments (3)
Flip Tax - Anonymous Jul 20, 2007


In my opinion, flip tax is indicative that the co-op funds may have been wasted at some point in time and a flip tax was needed to dig the co-op out of a hole. It is unfair to those who are living there already because those who have recently sold escaped the flip tax. I feel that if a flip tax is absolutely necessary, it should be assessed upon future purchasers who later sell, not current owners. Also, I feel that flip tax has a negative impact on sales value. Flip tax is too much money to "cough up" to a place that I will no longer live.

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> Join the conversation Comments (3)
So, do a toll road - AdC Jul 20, 2007


Assess on a yearly basis and everyone who owns shares of an apartment pays for current and future capital improvements. After all today's capital improvements may be attributed to be the "legacy" of those who sold before.

If reserve funds are important in sales, then even if shareholders do not partake of future improvements, they are partakers of the "attrative" value of its reserve funds thanks to everyone's contribution to the "offertory box."

Just like you, I am not a fan of flip taxes. I would only impose it in those cases where people flip a unit in less than 2 years in a high market.

AdC



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> Join the conversation Comments (24)
Flip Tax - Anonymous Jul 21, 2007


Ah, besides funding the building, flip tax is to prevent investment flippers. Ok, then flip tax can be assessed on a proration basis (ie sales on 1 year ownership 3%, on 2 years 2%, on 3 years 1%, thereafter 0%). And, in most likely case, monthly maintenance would have increased to continue to support the co-operative. Maintence charge is for the purpose of paying current and reserving for future expenditures. Lack of budgeting know-how and money squandering is mismanagement. Anyway ,I still feel that flip tax is a farse.

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The toll road concept - AdC Jul 24, 2007


Flip taxes have never been my cup of tea. Perhaps for certain buildings and real estate markets it may be fine, but not for others. The "cookie cutter" mentality should be broken and adopt what makes sense to your particular building and for the particular moment in history.

For example: (1) A building with a high sponsor representation should not have flip taxes. Who do you support? The sponsor. Assessments would be the logical way to go in order to have the sponsor pay too. However, board must check their by-laws to find out if they have the right to assess unilateraly or if they need the sponsor's blessing.

(2) Apartmsnt buildings with small number of sales a year should not have a flip tax. Why? What is the money that you expect to collect that will add significantly to your coffers.

(3) Bad markets - Rethinking of a flip tax becomes mandatory.

To call shareholders greedy for not instituting a flip tax is absolutely ridiculous. If you were to assess, everyone contributes and those who flip will surely will pay for what will come in the future.

Finally, assessments and flip taxes are negotiated among sellers and buyers. A buyer may opt to pay for remaining assessments or demand from the buyer to pay depending again on the market. The same goes for flip taxes - who pays is subordinated to how much you want an apartment or how much you want to sell.

So, a free market mentality is important to preserve, but at the same time re-think what makes sense for the common good of an entire building.

AdC


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Flip taxes - RLM Jul 25, 2007


AdC, even a small number of sales per year in a smaller (45 unit) building can have significant impact, especially when the flip tax is a percentage of the sale price and prices are rising.

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Perhaps you're right - AdC Jul 25, 2007


But, I am not convinced. I believe in the system of paying for what you consume, i.e., an assessment is healthier as it makes shareholders partakers of the improvements and beneficiaries of a stronger reserve if this is part of the issue.

We have sublet fees, but in reality have been used to subsidize maintenance. Then, the problem becomes for the shareholders who remain a two way street: low maintenance due to higher # of sublets as well as problems created with banks and type of perception on the building, or higher maintenance bu with a stable population of residents with better appreciation for their own property. (Note, perhaps at times - as not all renters are inconsiderate to property or rules)

As I mentioned, the cookie mentality does not fit all. Use the best business judgment when trying to institute a flip tax.

In your case of 45 units where 2 only sell a year, and depending on the price demanded by the unit and % used, to raise $10,000 or $20,000 may mean so much to your reserves in a good year and $7,000 the next year. It is just like interests in a bank account. Not a reliable source to make a hugh impact. In fact Ted,NJ's co-op has assessments every year as part of their strategy and everyone boasts of how well his building is doing. This is call commitment to a property and to the place to call HOME!

AdC


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to ADC - RLM Jul 26, 2007


You're right that a cookie-cutter approach will never work.

Except when making cookies. : )

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Not *supposed to be* a reliable source - Steve Jul 30, 2007


Hi, AdC,

Don't make the mistake of thinking that income from flip taxes is expected or part of the budget. In fact, no CPA will permit you to include flip tax revenues in a projected budget (because doing so is prohibited by generally accepted accounting practices).

Instead, think of flip tax revenue as extra money that can go to reducing the amount shareholders have to be charged for a new roof/boiler/elevator.

As for other comments about the need for a flip tax, I think that many people misunderstand how some co-ops (and mine) come to have one.

Our co-op had no reserves. Zero reserves hurts sales. Zero reserves hurt the corporation. Zero reserves leaves the shareholders to open their checkbooks when capital improvements are needed. So the board said, We need reserves!

The board explained that we can either pay a little at a time through a maintenance increase, or we can have sellers pay a portion of their selling price to the corporation. (Think of it as a way for the co-op to get back a little bit of what the co-op did to improve the building while the shareholder was a resident).

Our shareholders opted for a flip tax. As a former treasurer, I'd rather have the income as maintenance because it's constant and it's part of the budget. But the shareholders spoke, and the board listened.

Finally, for those who are opposed to a flip tax because they think it leads to mismanagement: This kind of argument is a red herring. If your business is being mismanaged, it's not because there's a flip tax. (Enron didn't go down in flames because it was trading in energy futures; it went down because it did so corruptly and left lots of tracks.)

If you think there's mismanagement on your board, run for office!

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Re: Not *supposed to be* a reliable source - Anonymous Jul 31, 2007


Hey Steve,

You say, "Finally, for those who are opposed to a flip tax because they think it leads to mismanagement: This kind of argument is a red herring. If your business is being mismanaged, it's not because there's a flip tax. (Enron didn't go down in flames because it was trading in energy futures; it went down because it did so corruptly and left lots of tracks."

You misunderstood, flip tax is a result of mismanagement.

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Taking Sentences Out of Context - AdC Jul 31, 2007


My statement of not "supposed to be" reliable source of income was taken out of context, since I established a comparison between "interest rates" and "flip taxes" are ot being "reliable."

However, your accountant has to account for monies that flow in and out of your operating account into reserves, etc by way of your income statement.

Your statement, "Instead, think of flip tax revenue as extra money that can go to reducing the amount shareholders have to be charged for a new roof/boiler/elevator" is not truly accurate either. The money that you receive through flip tax is accounted by way of your income statement as part of a "flip tax line item." The surplus in your income statement is then converted to "Reserves" for your "Capital Expenses."

However, should your taxes be higher than expected or your oerating expenses suffer an unexpected increase, your "reserves" need to be move to "patch the hole." Then, it's up to the board to determine if to access for the deficit or just use the reserves without inconveniencing your shareholders.

And as Lily Tomblin used to say (Watch out!, I'm dating myself), THIS IS THE TRUTH, PRUURRR!

AdC



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The root of all evil? - steve Jul 31, 2007


Hi, Anon 7:58,

I don't understand why a "flip tax is a result of mismanagement."

This seems to be the syllogism you're using: Flip taxes are enacted by co-ops. Some co-ops are mismanaged. Therefore, flip taxes cause mismanagement.

Mismanagement comes from all sorts of causes. Poorly trained board members, inadequate supervision of staff, shareholders who refrain from their oversight responsibilities.

Income does not cause mismanagement. That's not to say that people won't be tempted to dip into a pile of cash. But notice the difference: money (whether from the laundry machines, insurance settlements or a flip tax) is one means to mismanagement. Money does not cause mismanagement. It's just a darned good incentive for the unscrupulous.

Can you explain why you find a flip tax to be so bothersome? Not on subjective grounds -- no one *likes* paying more, even if it's for a new sidewalk that benefits everyone. I'm looking for an objective reason to back up your claim.

Personally, I'd be happy to do away with the flip tax in my building if we could have a higher maintenance fee. After all, our maintenance fees are in the lower third of maintenance rates for our borough, and just at the average rate for our neighborhood (which likewise is lower than the average).

Buildings on Park Avenue with wealthy shareholders can afford to charge high maintenance fees to cover all their costs AND to build healthy reserves; other buildings may enance a perpetual assessment to do the same.

Any way you look at it, X amount of revenue has to come in. Whether the shareholders want it to come from 1 source or 7 sources doesn't reflect on the board's quality or ability. (In fact, if you ask financial people -- of which I am not one -- most would tell you that having a broad base of income is safer than having a narrow base, such as relying only on maintenance.)

Money may be the root of all evil, but it takes corrupt people to mismanage it.

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Reserves - steve Jul 31, 2007


Hi, AdC,

Thanks for the thoughtful response.

I certainly didn't mean to take your comment about a reliabe source of income out of context. My apologies.

My point was that flip tax income cannot be used in income projections (i.e. the budget). Yes, the accountant records flip tax income, but only after the fact. That's what you're referring to (the income statement). The budget, of course, attempts to foresee the future, and the GAAP prohibit using an income source as capricious as flip taxes in a corporation's planning.

You point out: "The money that you receive through flip tax is accounted by way of your income statement as part of a 'flip tax line item.' The surplus in your income statement is then converted to 'Reserves' for your 'Capital Expenses.' "

That's what I was trying to say. Money from the flip tax comes in, is assigned a category by the accountant (and accountants do love categories), and is placed in the reserves account. I could have been clearer: The amendment to the proprietary lease that approves the flip tax can require that flip tax income be used only for capital improvement (as it is in my building).

"However, should your taxes be higher than expected or your oerating expenses suffer an unexpected increase, your 'reserves' need to be move to 'patch the hole.' Then, it's up to the board to determine if to access for the deficit or just use the reserves without inconveniencing your shareholders."

Yes, exactly! The higher the reserves, of course, the less likely shareholders will have to be bothered by yet another dreaded assessment. Which is why our shareholders are pleased to have a healthy reserves account -- funded by their flip tax.

"And as Lily Tomlin used to say (Watch out!, I'm dating myself), THIS IS THE TRUTH, PRUURRR!"

She's a national treasure!

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Essentially we agree on accounting - AdC Jul 31, 2007


However, the bottomline here is, your philosophy is different from mine. How we raise reserves is seen in two different perspectives.

I'm glad you defend flip taxes. Someone may find it beneficial. To me, I only see flip taxes as a contribution by those who flip, i.e., investors who only want to reap a gain in 3mo to 24 months.

As I reiterated, every board must do an analysis of their situation and use whatever FITS their philosophy and builidng situation. To make converts of one religion will take the reachness away of dialog.

Thank you for enlightening those who may have followed the exchange.

AdC

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Steve - flip tax - J Jul 31, 2007


I believe in your premise that flip taxes should be used for reserves and not for current expenses - unfortunately our coop depends on the flip tax for maintenance expenses -but of course we have major problems regarding where our money goes - However, if you have already received income during the budget period from flip taxes - how can you not include it in the budget since it is income to the corporation - the problem is to protect this source of income and make sure it goes to reserves - and in our small coop it is a great source of income because so many many shareholders move each year - but of course that is because we have major increases and assessments each year and nothing goes toward the building

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"budget" vs. "income statement" - Steve Jul 31, 2007


Hi, J,

Thanks for your comments. I'll respond to them as best I can.

> unfortunately our coop depends on the flip tax for maintenance expenses

It's awfully easy for that to happen, especially when maintenance fees are too low to support the co-op's entire costs. (I'm assuming your co-op is run on the up-and-up.)

In our co-op, the resolution that shareholders passed to approve the flip tax requires that flip tax income be used exclusively for capital improvements.

(As an aside, if you live in Manhattan and want to find out if your maintenance is high or low, search in the field at the top of this screen for "maint fee comps" and open the message dated Friday, April 13.)

> -but of course we have major problems regarding where our money goes -

I'll take your word for that.

> However, if you have already received income during the budget period from flip taxes - how can you not include it in the budget since it is income to the corporation

The reason is in terminology.

Let's say your fiscal year is the calendar year. Around November, then, you'll be preparing your 2008 budget of expected income and expenses. Your accountant will ask you to predict your maintenance income and fuel costs, but he/she will not allow you to include your predicted flip tax income. Your budget is then completed and approved in, say, December 2007, before 2008 begins.

When flip tax income arrives in 2008, it doesn't go in the budget because the budget is already final. (It's not a living document: once it's approved, in the previous year, you don't change it. You may, of course, make adjustments in spending based on changes that happen in 2008. But the budget itself doesn't change.)

The revenue shows up on your income statement, which your accountant will prepare in January 2009.

In other words, flip tax income shows up AFTER it is received. Income from maintenance, the laundry room, storage cages and the like are predicted BEFORE it is received.

Remember, a budget is a prediction. An income statement reflects fact.

> - the problem is to protect this source of income and make sure it goes to reserves - and in our small coop it is a great source of income because so many many shareholders move each year - but of course that is because we have major increases and assessments each year and nothing goes toward the building

That sounds like a problem. If you're increasing the maintenance (I think that's what you're referring to) and implementing assessments each year and still "nothing goes toward the building," I assume that all that revenue goes to paying your bills. Either your expenses need to be reined in or, if they are already, you need more income.

(This idea that money can always be cut and that any increase in income means skimming or profiteering is going on is the same reason the U.S. won't pay for poor children's health care and why New Orleans is still an utter mess. The truth is that if you want things improved, you have to pay for them.
(Of course, some organizations are run by the unscrupulous. Enron comes to mind.)

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Correction: Search field - Steve Jul 31, 2007


Oops! The search field is on the main Board Talk page, not the message page. Sorry for the confusion.

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J - question(s) - RLM Aug 01, 2007


How large is your co-op (how many units)?
Where is it located (Midtown? UWS? DUMBO? LIC?)
How old is the building?
How many staff do you have?
What's the "average" maintenance fee?

If you can supply this info, we might have a better snapshot of your problem....

RLM

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to "anonymous" - RLM Aug 01, 2007


"Flip tax is a RESULT of mismanagement"?

I disagree strongly.

Each co-op has highly individual problems. Some are rich with only 8 units and 10 staff; others are poor with 45 units and 1 staff.

Beginnings are critical. If the building was in good financial shape and had a motivated sponsor, it's probably in great shape now; if it was financial tenuous and had a sponsor and new Shareholders treading water, it's probably still a bit shaky.

Maybe Shareholders in YOUR area can afford $5000 per month average maintenance fees; ours won't support that much (thank the heavens!) - and maybe YOUR building is newer and requires less work to keep it running (unlike our 100-year-old beauty). Maybe you even have commercial space which supplements your "good" income; we're zoned so we can't have ANY.

Generalizations such as yours are counter-productive and serve only to make newbie Board Members (and even veterans) feel badly about their own co-op.

But maybe that's why you chose to remain "anonymous"?

- RLM

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another way to look at flip taxes - RLM Aug 01, 2007


In a way, flip taxes are similar to capital gains taxes.

You buy shares, you sell them. When you sell, you pay a percentage of the sale price (or the profit, or however your co-op has arranged it).

Essentially, the seller makes a profit -- so why shouldn't the co-op benefit, especially if it puts the funds into capital improvements?

Wish "regular" businesses would do the same, rather than throwing it at investors to shore up the company's value on the stock market.

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flip tax and bldg management - Anonymous Aug 01, 2007


RLM,

You say, ""Flip tax is a RESULT of mismanagement"?

I disagree strongly.

Each co-op has highly individual problems. Some are rich with only 8 units and 10 staff; others are poor with 45 units and 1 staff."

Uh, overstaffing and understaffing IS mismanagement. I know you were giving an example, but nevertheless, it is still mismanagement.

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For Steve Comparing Maintenance Charges - Lefty 357591 Aug 01, 2007


Can you please give me a more specific link to the Comparison of Maintenance Charge you referrred to.

I look on the Board Talk page and did not see it.

Thanks for your help

Howard

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capital gains taxes - AdC Aug 01, 2007


Please, give me a break. To compare flip taxes to capital gains is rather ridiculous. Flip taxes may have to be adjusted according to market. Sometimes, a shareholder may be losing money depending on market. So, because we are living at the end of an upcoming market that have lasted seven years (2000 to 2007) in some areas, don't tell me that everyone is every selling is making money.

Again, I repeat my sentence, "don't try to make converts of one religion." Co-ops should be free to adopt the BEST method under their BEST BUSINESS JUDGMENT to increase their reserves. To use FLIP TAX, ASSESSMENT or other sorts of FEES to increase your revenue is a matter of analyzing and adoptng what is good for the co-op and its shareholders.

AdC

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Maintenance Fee Comps - Steve Aug 01, 2007


Hi, Lefty,

I'll do you one better: Here's my post from April on maintenance fee comps in Manhattan. (If you want to find the original, I typed in the search field "maint fee comps." That brought up three posts. Select the one from April 13, 2007.)

The references are to the original poster's question and the data she supplied.

Cheers!

* * * * * * * * *

Let me discuss [the poster's] original question first: Is $6.40 per share too high for a maintenance fee? It's impossible to give an answer to that question. Many people assume that one share in your building is equal to one share in my building, and equal to one share in every other co-op in the five boroughs.

It's not. Thanks to the wisdom of the lawyers who draw up co-op papers and the staff of the attorney general's office, which blesses those papers, the number of shares in a co-op corporation is arbitrary. For example, your 86-unit co-op has 19,760 shares. My co-op has 43 units and about 26,000 shares. So you can see that the price per share cannot be used for comparisons among co-ops.

So how do we measure one to another?

The way I do it -- and I'm no statistician, just a board treasurer who got tired of the complaints about our maintenance fee being "the highest in Manhattan" -- is to look at the monthly maintenance paid (in dollars -- NOT in shares) and divide it by the size of the apartment (in square feet). So, for example, if Alex pays $1200 a month in maintenance for an apartment that's 900 square feet, she's paying $1.50 per square foot.

1200 / 900 = 1.5

The weakness of this comparison is that it does not take into account tangibles (doorman or not, health club or not, basement apt vs penthouse) or intangibles (grand or dingy lobby, pre-war or modern, how recent the renovation, "fixer-upper" vs "move in tomorrow"). The strength is that it's quick and easy, especially because figuring out which building has which amenities is a challenge.

I decided to find out the average maintenance price in Manhattan co-ops by neighborhood. My source is a feature in the Sunday Real Estate section of The New York Times. If you're familiar with the paper, you've seen the "Sales Across the Region" grid. The top row always shows Manhattan sales. For 24 months (October 17, 2004, through October 15, 2006) I recorded every Manhattan co-op sale (not cond-op or anything else) by area (square footage), monthly maintenance, and neighborhood.

Here are the results. They include only those neighborhoods with at least five sales during that period in The Times. From most expensive co-op neighborhood to least, by square feet:

Midtown East: $1.42 per square foot
Murray Hill $1.40
Upper East Side: $1.36
Midtown West: $1.33
Chelsea: $1.25
Greenwich Village: $1.17
Grammercy Park: $1.07
East Village: $1.07 (tie)
Upper West Side*: $0.98
SoHo: $0.97
TriBeCa: $0.87
Hudson Heights: $0.86
Morningside Heights: $0.86 (tie)
Hamilton Heights: $0.75
Inwood: $0.73
Washington Heights: $0.70
Harlem: $0.51

*I included "West Side" sales with "Upper West Side."

So to answer your question (finally!), is your maintenance too high? Let's take a look.

You own 324 shares at $6.24 per share. That's $2022 monthly maintenance (rounded up). Your apartment's size is 1650 square feet.

2022 / 1650 = $1.225 (call it $1.23) per square foot

You live on the Upper West Side, where the average monthly maintenance is about 98 cents per square foot. So it's quite a bit higher than the average for your neighborhood.

But before you boil over, let's look at your entire building. It has 19,760 shares at $6.24 each, for a total monthly rent roll (that's the legal term, since in a co-op we rent from the corporation) of $123,302.40. You point out that according to Property Shark, the total residential area in the building is 121,313 square feet.

123,302.40 / 121,313 = $1.016 (call it $1.02) per square foot

That's four cents per square foot above your neighborhood average. (Or, to be more precise, 3.6 cents above.) So I would say that your building is neither too high nor too low, but basically spot-on.

Unfortunately for you, you live an apartment that has disproportionately more shares than your building's average. That means there's some lucky shareholder in your building who has many fewer shares! How are shares allocated? That's another story -- but in short, it's arbitrary, based on such things as the view, the number of bathrooms and bedroom, and so forth.

(Let me add that in the case of my figure for the UWS average, it's based on 57 sales. The most expensive I found on the UWS and West Side was $1.70 per square foot. I don't write down the addresses, but if you're curious look in The Times of Feb. 12, 2006. The least expensive was 57 cents, in The Times of one week earlier.)

If hope you find this useful. It sure taught me a lot about maintenance fees in the city.

In case you're wondering, I discovered that my building does not, as one shareholder put it, have the most expensive fee in Manhattan. It's 88 cents per square foot, which puts us in the middle third, in between SoHo and TriBeCa.

Cheers!
steve

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Maintenance - Lefty357591 Aug 02, 2007


Wow!
Thanks Steve.
You are a gentleman and I would like you to be my guest for lunch.

My e:mail is Exitement@aol.com

Howard

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Maint fee info - steve Aug 02, 2007


I'm glad you find the info helpful! And thanks for the lunch offer. I'm getting ready to leave on a nice vacation, so I'll take a rain check. Enjoy your summer!

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J questions - J Aug 02, 2007


The answer to your questions is very simple - money disappears - not how many staff, etc - money is taken out of our disbursement ledger stating that it is paying for xxxx - but that is not true - and I am not dealing with petty cash - try $100,000+ a year, and in addition unfortunately capital improvements somehow cost double what the original contract was and that was more than it should have -

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How a flip tax is used - Steve Jul 20, 2007


There are plenty of ways to raise money in a co-op. Just because there's a flip tax, it doesn't mean that funds are poorly managed.

In my building, for example, the shareholders want the lowest maintenance we can get away with. One way to keep monthly maintenance low is to impose an assessment -- one that's open-ended, so it doesn't terminate. Looks good on paper ("Hey, that's low maintenance!") but it's another fee you have to pay.

Another way is a flip tax.

Alternatively, we could eliminate the flip tax and increase the maintenance to make up the difference.

Just like you, a corporation needs money to pay its bill. Think of income from the maintenance fee as your salary from a regular job. Think of flip tax income as freelance work on the side. Together, you have enough to pay your bills, and maybe some to save for retirement. But if you want to stop freelancing, you have to ask for a raise or cut back on retirement savings.

One reason our shareholders passed a flip tax - and then passed an increase in its amount a year later -- was the board's selling point. They explained that when the shareholders kick in to improve the building (new lobby, new boiler, adding a porter), sellers benefit the most because their apartments are worth more when they sell.

But the shareholders who stay don't see a financial benefit (just the practical one).

With a flip tax, however, even the shareholders who don't move away for decades can realize the financial benefit of paying for improvements.

Sure, the flip tax can be a drag on sales. So can the purchase process in New York City. But if you're in a well-run building, and especially if you're in Manhattan, the only drag on sales will be from the next great depression. Even after 9/11, apartment prices kept going up.

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> Join the conversation Comments (6)
Flip tax - Anonymous Jul 21, 2007


Why have flip tax when you have service contracts, warranties, and insurance? All budgetable.

I know that there's insurance for "business disruption". If a boiler breaks down or if there's a blackout, would these be categorized as business disruption? After all, a co-op is deemed to be in the business of habitability.

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Flip Tax - Outside Budget - Steve Jul 21, 2007


"Why have flip tax when you have service contracts, warranties, and insurance? All budgetable."

Yes, Anonymous, those are all budgetable. But if your budget equals income, then you cannot budget for capital improvements without A) raiding the reserves (which is OK, but a drain nonetheless) or B) imposing an assessment.

Flip tax income, on the other hand, is NOT included in the budget (under generally accepted accounting practices). Your accountant will not permit it. Therefore, income from flip taxes is extra money that can be applied to a new boiler (or whatever) without having to raise the money from shareholders.

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boiler insurance? - Steve Jul 21, 2007


"I know that there's insurance for "business disruption". If a boiler breaks down or if there's a blackout, would these be categorized as business disruption?"

Well, if the boiler breaks it won't be covered by insurance. Maybe the problems it causes will be, but boilers wear out. And then you have to buy a new one.

And even if you found a way to get your insurance agent to cover the cost, your rates will go way up next year. Or the agent will drop you because you're a high risk. And that, as your high school guidance counselor said, goes on your permanent record: other insurance companies can find out that info. So it's a long-term expense for the co-op.

(Insurance for a business is just like insurance for a car or the policy that covers your camera. Every time you get in an accident or lose your camera and file a claim, your rates go up. Do it often enough, your insurer will drop you. Remember, insurance agents have to make a profit too.)

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(to Anonymous) - V Jul 22, 2007


But a co-op also must meet rising financial obligations. Shs will get tired of the building always going into their pockets for extra money. There have to be other ways to generate revenue other than maintenance increases and assessments. You have fund raising and flip taxes. Any other ways to generate funds?

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Re: (to Anonymous) - Anonymous Jul 22, 2007


I wonder if donations is an option. Is there a tax deduction classified as a charitable contribution? Because, after all, a co-op is a not-for-profit corporation.

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Tax deduction for donation - V Jul 23, 2007


I was told by the Board President that since we were not a charity, no donations could be tax deductible. But it is a good question and she is not a tax expert.

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(to Anonymous) - V Jul 21, 2007


I agree with your assessment
the co-op or condo appreciated and made it possible for the enormous profit you as a seller are about to take. Have your buyer pay the flip tax because they will benefit from it more than you will.

In my building all the original buyers paid the flip tax, we didn't have a choice either. Why should we pay another flip tax and then leave the building? Let the new owners pay the flip tax just as we did.

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> Join the conversation Comments (2)
Flip Tax - Anonymous Jul 21, 2007


V,

Can flip tax be transferred to a buyer? I didn't know that. I guess that will work at a sought after building or neighborhood.

Darius

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Transfer of transfer fees - V Jul 22, 2007


In our co-op, the initial buyers all paid transfer fees. So they put language in the proprietary lease starting the the flip tax would be either paid by the buyer or split between buyer and seller.

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Benefits to shareholders - Steve Jul 20, 2007


You gotta sell it, baby!

Tell them why it benefits them! (You know the answer to that, right?) (If not, here it is: Shareholders who stay for years and years to come will see a financial benefit to the money they put into the building for a new boiler, updated lobby etc. How? When the guy down the hall sells his apartment after the new boiler and updated lobby are in, he will get more money for his apartment. Why shouldn't you -- a shareholder who helped pay for the boiler -- get some money back? Of course, that's money that goes into co-op coffers, not individuals', and that means lower maintenance increases in the future.)

Remember, the alternative to paying the co-op's bills with flip tax income is to pay it with higher maintenance fees.

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> Join the conversation Comments (2)
(to Steve) - V Jul 21, 2007


You would be surprised at the responses I get when I ask about the flip tax, I get one lame excuse after another:

They say: They don't want a flip tax because they want to control where the money is going. I say: You don't control where the money goes now! What will change?

They say: They need ALL their profit for the next residence. I say: How about being grateful for the profit on this co-op's sale to be able to purchase the next residence. How about a "goodbye and thanks" present?

These greedy and selfish ones won't budge an inch! Any ideas on how to sell the flip tax to the apathetic and non caring? Threats of maintenance increases won't scare these folks. They just wanna sell and get out!

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Counter-arguments - Steve Jul 21, 2007


Good questions, V.

"They say: They don't want a flip tax because they want to control where the money is going. I say: You don't control where the money goes now! What will change?"

You're exactly right. That response is not about a flip tax, but about controlling expenditures, which, as you point out, is a non-issue because they don't control expenditures anyway (unless they're board members).

However, the next time someone gives you that reply, ask him/her this: "The proposal you would vote on requires that any flip tax money be spent only on capital improvement," such as a new boiler, elevator, windows, roof, sidewalk and so forth. That way the shareholders actually have MORE control over how the money is spent, as opposed to all the other income. (Of course, you would want to run this by the board first.)

"They say: They need ALL their profit for the next residence."

Then they're cheating their neighbors for their personal benefit. The purpose of co-operative housing (get it? "cooperate"?) is to work together in the long-term interests of the corporation. Not to withhold money so an individual can afford a nicer place when he/she leaves.

You could point out that with flip taxes, the building could be improved (nicer doors/lobby/light fixtures, new paint, new elevator, hire a doorman or another porter to help keep things clean) and that with any of these, the value of a shareholder's apartment will increase.

By the way, why do the shareholders think they will have to pay? Make sure they understand that they should make their buyers pay the flip tax! In our building, whenever there are competing bids, the flip tax is the first thing a bidder offers to pay (if one of them hasn't already).

If, on the other hand, people don't mind their home going to pot because they expect to move out soon, well, there's not much you can do, I'm afraid.

For other arguments, check the Habitat archives.

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reserve fund and flip tax - Anonymous Jul 22, 2007


Ok, just make sure that flip tax do not go to the general reserve fund, but rather the restricted reserve funds. You can have more than one reserve fund account on the co-op's books. You can have a reserve fund each restricted for roof repairs, elevator replacement, boiler replacement, window replacements, emergency repairs. And a flip tax can be allocated to each fund on a set percentage.

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More about flip tax - BP Jul 22, 2007


V - "Selling" the flip tax to greedy, apathetic or uncaring Shs is no easy job. A few ideas. Tell them:

- Flip tax proceeds can enable you to do a key project more quickly (any maybe at lower cost) than if you have to delay it until you have adequate funds for it.

- Flip tax proceeds for projects you'll have to do in, say, 3 to 5 years can be invested and accrue additional money in interest or dividends.

- All Shs can benefit from a flip tax because improvements can be made that will enhance bldg value and make it a more desirable property which can help Shs get a higher price for their apts when they do sell.

- Along with notes in annual financial statements, the coop will inform Shs periodically on how flip tax proceeds are being used to improve the property and how this helps them.

- Flip tax reduces capital gains they'll pay on their sale profit. (I know bldgs that push this idea and I'm not sure if/how it works, so check it with your coop accountants!)

Don't try to win over Shs who may sell in a year. All they see is a flip tax cutting into their profit. Don't try to sell the idea in one meeting or memo. Keep a flow of info going. BTW, you don't necessarily have to get it voted in at one meeting. A Prop Lease can be amended with Sh written approval over a period of time (30 or 45 days), but don't make it too long or you'll lose Sh interest and momentum.

If it works for you, tell Shs in a letter what improvements cost since 2000 and what flip tax proceeds since 2000 would have brought in. They should be for capital projects, not paying bills, but here's another way to make your point. Do a little calculating and tell Shs what proceeds on sales in the last, say, 5 years could have paid for, for ex:
- 55% of the elevator upgrade, or
- 100% of whatever, or
- 80% of the coop's annual NYC taxes, or
- The super's salary for two years

In most bldgs, the seller pays the flip tax but a seller can stipulate in a sale contract that the buyer would pay the flip tax. Then the coop works this out with the seller so that the flip tax money goes to the coop and the seller doesn't just pocket it.

Also, you can have "a variable impact flip tax" for more fairness to some Shs. Business Corp Law (BCL) permits this.(I saw this in The Cooperator.) Your flip tax, for ex, can be a % of the sale price as long as that price is more than what the seller originally paid. Or a seller who makes no profit on his sale can pay a lower flip tax amount. But terms like this must be spelled out in the language of the amendment that incorporates a flip tax into the Prop Lease.

But the more fair you try to be to some, the more unfair it seems/is to others. Per the BCL, a coop must treat all Shs fairly and equally. Fairness has a way of working itself into knots, and the more disparity or accomodation Shs see the more resistance or complaints you may get. It's touchy.

Just a comment on something Anonymous said: "A coop is in the business of habitability." I know what you mean, Anon, but I think a coop is in the business of selling shares in its corporation and working to increase their value. Every corporation has products or services and wants to attract buyers who want to invest in the success of those products or services. A coop's "product" is a residential bldg. How habitable it is (i.e., how acceptable it is to live in it) is a big part of how good that product is. But there's a lot more to it - rules, management, board effectiveness, financial stability, good communication, Sh attitudes and willingness to cooperate and live as peaceably as possible with others - even bldg location, size, staffing, etc. I think a coop's business is value enhancement, in all the fair, legal, responsible, resourceful, and promising ways it can accomplish that. Just my opinion.

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flip tax one more time - Anonymous Jul 23, 2007


BP,

You mentioned,"- Flip tax reduces capital gains they'll pay on their sale profit. (I know bldgs that push this idea and I'm not sure if/how it works, so check it with your coop accountants!)"

Are you sure? I know that in a single family home, for example, one can add capital improvements to the basis of the house. Thereby, the sales profit is reduced and taxes are reduced. But, how can one do this from a flip tax which is supposedly used for capital improvements that have yet to come.

Also, how can a shareholder add his share of the capital improvements to his basis?

In all previous discussions on flip tax, passing it to the buyer is best. If you want to live in this building, contribute to the coffer. And then, it is the offer of the seller to pay it for the buyer, just like closing costs.


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flip tax - benefits? - J Jul 21, 2007


I have read all the replies regarding flip tax - however we have always had one - basic documents when the coop gives up the right to repurchase - we had to pay - however in the last 3 years our tax has gone from $7.50/share to $15/share, that does not includes all the assessments and raises that we have received every year - If you have a good board - fine - but if you don't all the flip tax is is another way to garner money that can disappear - and flip taxes really should not be used to supplement basic income for maintenance - put it in reserve fund for repairs and replacements otherwise it disappears and you still have to find the money to pay for the elevator, boiler, etc

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> Join the conversation Comments (1)
Theft is not a flip tax issue - steve Jul 21, 2007


"If you have a good board - fine - but if you don't all the flip tax is is another way to garner money that can disappear"

If you believe you have money disappearing, you need to spread the word and get a new board in power. Or call a special meeting of shareholders and address those concerns. This problem, after all, is not about income (be it from a flip tax, maintenance or tax rebate) but about impropriety on the board.

" - and flip taxes really should not be used to supplement basic income for maintenance"

Excellent point. In our building, the language that shareholders approved for the flip tax specifically stated that the income from flip taxes should go to reserves to pay for capital improvements. Again, this issue is not about a flip tax per se, but about how the money is spent.

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More re: flip tax - BP Jul 21, 2007


Every coop/board has to decide for itself how to manage, use and raise funds. But as I said, you have to do a good selling job to get Shs to vote in a flip tax. And as others said, all owners benefit in various ways from it.

If a flip tax passes, the Prop Lease is amended (i.e., changed). It's my understanding that, BY LAW, the flip tax applies to all owners when it's voted in whether they've owned shares for 2 years or 20 years, and it thus applies to all Shs whether they voted for it or not. I'm almost positive of this. Check with your coop attorney.

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More on flip tax - BP Jul 20, 2007


There MAY be something in a Prop Lease that can be changed by board resolution only (in some cases there are, but your attorney would have to check this out) but a flip tax is not one of them.

V - you said you made the mistake of "relying" on a super- majority to pass a flip tax. That sounds like you weren't sure what % of shares you needed and just hoped for a super-majority. Maybe you only need 51% or 66-2/3%. A section in the Lease entitled "Changes in Terms and Conditions of Prop Leases" (Paragraph 6 in ours) states what % of shares you need to change/amend the Lease. Trying to pass a flip tax should never be done without your coop attorney's help, and the language and the terms of any change/amendment should be very precise and complete.

There are also different types of flip tax: per-share, flat fee, % of sale price, % of net profit, or a combination of them. Shs might vote for a per-share but not for % of sale price if they worry that the board will change the % (say, from 4% to 6%) at any future time - which a board can do.

Before you ask Shs to vote on a flip tax you have to decide what type of flip tax would be best for your coop based on things like how pricey your apts are, how many new v. long-time Shs you have, if you have good relations and support from Shs or if you have a lot of opposition/complainers, etc. Then you have to wage an "ad campaign" for the flip tax. You have to "sell" it - tell Shs all about it, stress its benefits, explain that it can raise money for future projects that won't come out of everyone's pocket, etc.

NOTE TO ALL - Check with your coop attorney on this first but here's something many bldgs do. Some do this and don't even bother with all the hassle of trying for a flip tax.

By board resolution only, a board can enact a coop policy (like it has the power to enact any policy) establishing a fee on the sale of shares. The board sets the fee amount (typically, equal to a total of 4 or 6 months maintenance) payable to the coop at an apt closing - usually 50% by the seller and 50% by the buyer.

You can't call this a "tax" or use certain other language. Your coop attorney can advise you about this. Some bldgs call it a "Move-in and Move-Out Fee" or an "Administrative Transfer Fee". Worth looking into ~ But again, don't do this without consulting with your coop attorney first.

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(to BP) - V Jul 21, 2007


Thank you! We believe we needed a 2/3 majority of yes votes and did not get them. Will seriously consider your response.

Is there any scenario when a building survived financially without every having a flip tax?

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Reply to V - BP Jul 21, 2007


A lot of coops don't have a flip tax and they're surviving financially. Some are in A-1 shape, some are OK, and some are barely getting by. But the same could be said for bldgs that do have a flip tax. Most hold the funds from a flip tax in reserve for capital improvement projects, but some use it to pay off bills, etc. Flip tax or not, I think how well a coop is doing financially depends on how well funds are managed and utilized by the board/mgmt.

More and more bldgs are adopting a flip tax or enacting a fee on the sale of shares. It's a hedge against rising costs and a good way to raise money (in part or full) for bldg projects/upgrades without having to hit every Sh in the wallet more often than you have to.

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To BP - RLM Jul 23, 2007


You wrote, "I think how well a coop is doing financially depends on how well funds are managed and utilized by the board/mgmt."

Also remember there was a real estate tsunami not all that many years ago, and many buildings that had just gone co-op got caught short of the pier with foreclosures on Shareholders converting from tenancy to ownership who drowned in the economic squeeze of the times.

Our co-op was a victim of this (I sometimes grow concerned about a repeat period involving subprime mortgages). Not ALL financial problems stem from ill managed or ill utilized funds. Some buildings have had to climb a long way back from a precipice that no one foresaw or could prevent, and certainly did not result from misuse or mismanagement of co-op funds.

In the case of our co-op, we survived that period on luck, skill, and pure determination (as well as the judicial application of flip tax income to badly needed repairs of our infrastructure), and are now safely on shore.

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Revoking Voting Rights - boardnew Mar 28, 2008


We have a shareholder 3 months in arrears and the Board has chosen to send a lawyer's letter demanding payment. Should we also notify his lender? Can we revoke his voting rights and, if so, even if he pays up can he be barred from voting in an upcoming general election or getting himself on the Board for a set period followins his delinquency? (he owns twice as many shares as any of us due to size of his unit which is problematic, as he is).

Lastly, we are attempting to get a 66 2/3 per cent share of votes to enact a flip tax. If arrears shareholder is barred from voting, does that mean we can get our 66 2/3 per cent to enact flip tax based on total amount of shares LESS the errant shareholder?

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Shareholder in arrears - BP Mar 28, 2008


Boardnew - Without knowing how "problematic" your SH is, I always think it's preferable to take an easier route first and have our property manager, not our coop attorney, send a letter to a SH in arrears asking him to pay up. It can also save you a little money in legal fees if it works. I'd copy the SH's lender on a second letter, not the first.

You can't revoke a SH's voting rights on any issues. That includes voting for a flip tax. If you need 66-2/3% for a flip tax to be enacted, that's based on the total number of shares for all SHs of record. Per Business Corporation Law (the BCL" with which all coops must comply), all SHs are to be treated "fairly and equally."

You also can't prevent a SH from running for the board if he wants to. If your board members campaign prior to your annual meeting to get themselves reelected and/or to win votes away from the SH who's in arrears, it would also be very inappropriate to tell other SHs that he's in arrears. This is personal, confidential information about him that other SHs should not be privy to. I assume that your board members are the only SHs who know about his delinquency.

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Arrears and Voting Rights - Boardnew Mar 28, 2008


Thanks for your response. SH in arrears has already received a letter from the Managing Agent and phone calls from Board Pres. and MA again, and still has not sent in any money. Is it time to engage counsel?

Regarding voting rights, I recall a story in NYTimes where it is possible to write into the Prop lease the requirements for being a Board member and being current on maintenance was a one of them.

In a book called "The Co-Op Bible (Shapiro, p.176) she recommemds buildings set Board members' qualification standards that are then written into the by-laws. Being "paid up" and having no violations" are suggestions she makes--it is protected by Corporation Law. Elseware in the book, she refers to revoking voting rights to SH in arrears is legal.

Anyone else?
BN

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Changes to the proprietary lease, carer required. - TedT-NJ Jul 20, 2007



Folks need to be very careful.

In our lease, certain changes require a majority of the shares, other changes require two-thirds of the shares and in some cases changes require eighty percent of the shares. In all cases, the percentages relate to total shares outstanding and not just shares voting.

Note the use of the word shares and not shareholders.

But, as others have counseled, it should be in your proprietary lease and you or your counsel need to review the stipulations.

Recently, about a year ago, a coop in NJ attempted to convert to condo. My recollection of the circumstances is the building&#146;s proprietary lease required 80% of the shares to vote for the conversion. But certain amendments to the lease were permitted if 66.6% of the shares voted for the change.

A major brouhaha arose which, to some extent, is still being litigated. The conversion, by the way, did not occur.

The gist of the affair is that an attempt was made to amend the 80% rule to a lesser amount with the co-op&#146;s 66.6% rule, and to then use the 66.6% as the basis for conversion. Alternatively, the argument was made that the 80% rule did not apply as the co-op corporation would continue to exist as an HOA. In all, I am being circumspect, as I was not privy to all the details of the situation.

Dissident shareholders sued and the court sided with the dissidents and in effect opined that the co-op&#146;s 80% rule could not be vacated in the manner described above.

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Re: Flip tax - AR Jul 25, 2007


Boy, looks like I missed a hot topic here!

I didn't read through everything, but Ted from NJ gives sound advice. Have your corporate council review your PL and offering plan to ascertain the type of vote it must be put to, if the sponsors vote counts or not, etc..

I just passed one in one of my UWS buildings... Good luck

~AR

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