Fed Backs Down as Co-op / Condo Community Unites on Flip-Tax Issue
Feb. 2, 2011 — The Federal Housing Finance Agency (FHFA) came up against an enraged New York co-op and condo community. And blinked. Yesterday the agency backed away from implementing a rule that would have seriously damaged the ability of properties to impose flip taxes.
Spurred on by real estate groups like the Council of New York Cooperatives & Condominiums (CNYC) and the Real Estate Board of New York, and publications such as Habitat, thousands of cooperative and condominium owners contacted the FHFA, Senator Charles Schumer and Representative Carolyn Maloney this past fall to protest a new rule the federal government had proposed — but not implemented — that would have restricted Fannie Mae, Freddie Mac and the Federal Home Loan Banks from making loans to buyers on properties encumbered by a “private transfer fee covenant,” more commonly known in New York as a flip tax.
The FHFA regulates these government-sponsored enterprises that provide more than $5.9 trillion in funding for the U.S. mortgage markets. The FHFA was proposing a “guidance” that would restrict lending in buildings with private transfer fee covenants.
“FHFA’s primary intent is to stop developers from imposing 99-year covenants on new homes that require sellers to kick back a percentage of the sale price of the home to the developer when the homeowners sell their home,” Stuart Saft, a partner at Dewey & LeBouef, said in October. “While this is not a prevalent practice in New York, it has gained popularity in the Southwest and in Florida.” He added: “This rule is arbitrary, capricious, and will destroy one important source of financing in the co-op and condo community.”
Unlike the homes and associations being targeted by the FHFA, New York’s properties use transfer fees for the overall benefit of the building and not for the profit of the developer. Besides being fiscally prudent, argued Saft in a letter to the FHFA, didn’t such a move fall in line with the FHFA’s existing policy that boards reserve a percentage of each year’s budget to fund present and future capital repairs? A major source of such income is flip taxes.
Saft, as chairman of the CNYC, met with various officials, including Maloney (whom he cites as “particularly helpful”) to block the change.
“I have heard that in the responses the FHFA got, even people who agreed that transfer fees should not benefit the sponsor, had no objection to the kind of transfer fees that we have had here in New York for the past 30 years, ones that return money to the association to help keep the properties running,” Saft says. “That is something that almost everyone agreed is a good thing. This is wonderful news.”
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