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There’s More Than One Way to Pass a Flip Tax

Bill Morris in Bricks & Bucks on June 20, 2018

East Village, Manhattan

Flip Tax

The refurbished balconies of the Hearth House co-op (image via Property Shark).

June 20, 2018

The Hearth House co-op in the East Village was in an uncomfortable but all-too-familiar bind. The building needed major work, but the reserve fund was anemic and the shareholders, mostly young professionals with children, had pockets that went only so deep. 

Some of the seven board members began promoting a transfer fee – also known as a flip tax – which would replenish the reserve fund by pocketing 2 percent of the proceeds every time an apartment got sold. But a couple of board members were thinking about selling their apartments, and they were, predictably, less than thrilled with the idea. It got voted down. 

But the need for $600,000 worth of repairs – to the roof, several balconies, and the six-story building’s leaky brick envelope – didn’t vanish. “We continued to explore ways to raise money, but there were no viable options,” says board president Loree Lash, noting that the co-op was locked into a mortgage that it could not refinance. “We didn’t want to raise maintenance because it was already substantial. We had imposed a couple of assessments. Some of us on the board still felt a flip tax was a viable way to raise money without burdening the shareholders. People have spent years enjoying the building, and we felt it was reasonable to ask them, on exiting, to leave some equity behind.” 

How could the board persuade the required two-thirds majority of the 16 shareholders? 

“We decided to propose grandfathering in a flip tax at a lower rate,” Lash says. 

“They agreed to give people one year to sell without a flip tax,” adds the co-op’s property manager, Jeffrey Weber, president of Weber-Farhat Realty Management. “After one year there would be a 1 percent flip tax, and after two years it would go up to 1.5 percent. I think it was an excellent idea. For people who oppose a flip tax, it’s usually personal – they’re thinking about selling their apartment. Giving them a year to sell without a penalty overcomes another typical objection – ‘When I bought my apartment, there was no flip tax. This isn’t fair.’ The phase-in gave them the chance to sell.” 

The handful of apartment sales that have been completed since the institution of the flip tax brought in some welcome cash, but they were not a panacea for this co-op. (The building also has two commercial condo units.) The board was finally able to refinance the mortgage in 2014, which included a $500,000 line of credit that proved crucial to fixing the roof, balconies, and leaky envelope. 

Even if the 1.5 percent flip tax is not a magic bullet, Lash is glad to have it in place. “Costs keep going up,” she says, “and you’re either going to have to keep raising maintenance or find an alternative source of funding. A flip tax used to be a deterrent to keep people from flipping apartments, but now it’s a way for boards to get needed money. For us, it’s just one of the rules. People factor it into the asking price when they sell apartments. It’s not really an issue.” 

For co-op and condo boards, nothing is certain but rising costs and taxes. The Hearth House’s elevator, for instance, is beginning to show its age. Lash says the flip tax helps the board prepare for the inevitable: “It softens the blows when they come.”

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