Should a FLIP TAX affect apartment prices?

I would think that you would look at a flip tax the same way you would look at high maintenance: it depresses the selling price. It's an additional charge, after all, & the buyer would have to add the flip tax to the sale price & all the other charges to get the bottom line.

I disagree.

I think in an otherwise healthy building with stable financials, a modest flip tax of 1% (or less) of the selling price paid by the seller deters nobody, nor does it affect the pricing of an otherwise well located unit in a solid building with nice light, views, finishes, layout, amenities, etc.

A flip tax of 2% of the selling price (or higher), however, would stop and make me think very long and hard.

Flip taxes have become so ubiquitous that so long as they are 2% or less I don't think they attract much attention. High maintenance hits you every month in the pocketbook and will definitely impact value since it figures into a buyer's montly payments--a flip tax doesn't. Also, a flip tax takes money you never really see, so psychologically it is easier for many people to part with.

Generally, in a coop, it's all a balancing act for the board. Flip taxes help infuse the reserve fund with new cash on a steady basis negating the need to increase maintenance as often or impose special assessments that would otherwise be financially required for the building to remain healthy. You don't want to turn to maintenance increases to get more money if you can avoid it since if maintenance gets too high buyers are turned off. But if operating costs go up--fuel, security, etc--then some maintenance increase may occasionally be needed. On the other hand, if capital improvements are needed (facade work, new windows, public hall redecoration, lobby renovations, elevator replacement, sidewalk vault reconstruction, new roof, new boilers, etc.) and the reserve fund (presumably fed by the flip tax revenues) isn't adequate to cover the costs, a special assessment spread over a period of time is usually preferable in the longrun to raising maintenance or increasing the flip tax beyond 2%. This is because (1) high maintenance hurts resale value and (2) special assessments are usually deemed to be offsets to capital gains when you sell--maintenance increases can't be used to offset capital gains.

A flip tax is worse than high maintenance, at least owners can work bring down the maintenance by negotiation with suppliers.

Also revenue from a flip tax disappears when market dies, and you end up with having to raise maintenance anyway.

I would never buy in a building that has one, in fact we scrappped in my last apartment, it applied only to the 'profits' made by the seller.

my building has a flip tax of 10% of the profit. it sux to have to pay it now that i have sold but i agree that lower maintenance has more of an impact to me. i have a relatively low maintenance for my neighborhood of $1193 for 1100 sqft. anywhere else in my hood neighbors are paying anywhere from $1500 to $2000 and higher for the same sqft. AND they have flip taxes. i am glad my building's flip tax has kept my maonthlies low.

There are winners and losers with flip taxes.

People who plan on staying for a long time win. Flippers lose.

i happened to just about break even by my estimation. i have lived in my place for 4.5 years.

if you stay for a period of time, does a buyer get the money refunded? If not then why is it called a "flip" tax. Shouldn't it be called an initiation tax or something like that.

the buyer? the seller pays the flip tax as far as i know. why would the buyer get it back?
what does it matter what it is called?

... or "stock transfer fee" ... or "shareholder profit-sharing" ... anything but "flip tax".

Topper has it right. With a long holding period, the NPV of a flip tax is usually trivial. There's the risk, of course, that your eventual buyer may not understand the concept of net present value, and may be deterred by what looks like an onerous tax on her eventual profit.

stock transfer fee is something else

i wouldn't mind the 2% flip tax once i am buying, but it adds uncertainty of what the flip tax once i have to sell will be. the longer and deeper the recession is, chances are the higher the flip tax will end up being. are there rules that limit how high the flip tax could get to?

i guess that is the nice thing about have a flip tax set as 10% of the profit of sale. no profit = no flip tax. actually there is a $500 charge.

no profit = no flip tax = sleazy under-the-table deals that deprive fellow shareholders of operating revenue

BA_DA_BOOM - haven't seen too many maintenance decreases unfortunately.

alan - no profit, shady deals, lowball prices = no board approval.
boards may get screw a bit here and there but it won't be by too much because they just want approve.

Sniper: Right. I just meant a name that doesn't include "tax" would set off fewer alarms. Also, I should have used "PV" instead of "NPV", since there's no stream of flows, just a single event.

i meant "won't" approve

generally it requires a majority of shareholders to agree to any imposition or change in current flip tax percentage. i would agree that its better to have a lower percent of sales price rather than getting into a higher percentage of profit. much less chance of screwing around and avoids the very real problem of no profits.

"generally it requires a majority of shareholders to agree to any imposition or change in current flip tax percentage."

so a building with a lot of older owners on fixed income is a no-no for a young homebuyer?

"generally it requires a majority of shareholders to agree to any imposition or change in current flip tax percentage."

Disagree. Goes building by building and depends entirely upon coop's by-laws. My last coop required neither a shareholder vote to institute the tax nor a vote to change it. It was a business decision reserved to the board just like maintenance fees and special assessments.

As you say, a flip tax is instituted to discourage flipping. my building has a flip tax on profit (10%)and it's been a beautiful thing for those who stay -- it has paid for a beautiful lobby, new roof and 4000 sq ft roof deck, free bike storage, new (free) basement storage cages. We haven't had an assessment since I've been here (over 10 years) and our maintenance is consistently low. I'm selling now and it's a drag to pay it, but it's going to buy the building a new elevator. Worth it in the long haul.

>>BA_DA_BOOM - haven't seen too many maintenance decreases unfortunately.

We held maintenance for many years, and got rid of all special assements, at least until i sold our last unit in 2002, we were there a total of 17 years. We also built up the reseve fund much higher than when the flip tax was in place.

Basically a flip tax is big red flag for bad management. The good news is, it's easier to get rid of one during a downturn, as the co-op would not see any revenue from it for years anyway, and the bills have to be paid now - force your board to trade a maintenance rise for removal of the flip tax.

Trinityparent is correct--a flip tax helps replenish the building coffers and that means fewer assessments for special projects. Most sellers just factor the flip tax into their asking price. Cost of doing business, ya know?

>> Most sellers just factor the flip tax into their asking price
True, they dont have a choice.

But it doesn't change the basic premise that it's about sticking the bill to someone else, it's just another form of "credit" where the current owners "borrow" from whoever they can convice to buy at a discounted price. Since we cant offset capital losses on property, it's an ineffecient way for a coop to fund it's aspirations, for a new lobby for instance.

BA DA BOOM: I don't know what the financing or maintenance issues in your building were or what the reserve was. But in most building (okay, every building I have ever heard of) over the last 15 years energy and labor costs have required maintenance increases have increased RE taxes. How on earth do you reduce costs by cutting deals for levied RE taxes? You can refi all you want, but an underlying mortgage still costs money and a building needs new window, reconstructed sidewalk vaults, Local Law compliance, lobbies, elevators, hallways, furnaces, roofs. These things have to be paid for, reserve funds have to be replenished. I've never heard of someone declining to buy in a building with a <2% flip tax, but I have heard (and read on here) of hundreds of potential buyers ruling out an apartment because of high maintenance. I think the position that maintenance increases are better than a flip tax is, frankly, absurd and unlikely to garner much agreement. Let's see who weighs in on the side of your unique perspective.

17 yrs and no maintenance increases or assessments?

time to submit resume to geithner....he could use that kind of help

Impact of flip t ax will vary by purchaser. Have to weigh the upfront cost of the flip tax against the anticipated benefits (in the form of reduced maintenance) from having a flip tax in place while you live there. If you plan to live somewhere for a much longer time than the average resident, the flip tax may actually *increase* the value of the apt.

If a co-op has a high maintenance burden, than I think a flip tax, to the extent it keeps the maintenance under control is a positive. If a buildings spending is out of control, and that is the reason for imposing a flip tax, than that is a negative.

Amateur: if a building's spending is out of control, it doesn't much matter how the problem manifests itself: a flip tax, maintenance increases, or special assessments. The problem is the spending itself and that is why I'd stay away from the building.

Flip tax is the fee imposed on a the sale of a unit for a percent of the profit the seller may have made. It is usually used to replenish the reserve fund. The reserve fund is usually used for major renovations and not to hold down general mantainence fees.
We just blew through 300,000 of our reserve fund for a new boiler, roof and elevator. The seller should look at it somewhat of a usage tax on the above items in a building.
Also for the seller it could lower you capital gains if there were profit.
I think 10% is excessive for a flip tax and would be somewhat turned off by this as a buyer. I think most buildings are around the 1 to 2% mark. Ours is 1%

bubbler....."Flip tax is the fee imposed on a the sale of a unit for a percent of the profit the seller may have made."

I was under the impression the flip tax was typically a percentage of the selling price, not the profit over cost as you've described.

What is the most prominent flip tax scheme?

It seems to me in this market, the one who may be forced to move due to job loss, mortgage rates readjustment, etc, is the one least able to afford to pay for the "amenities" of the building (new elevator, lobby, etc.) for the others who may be a bit more fortunate. I know when flip taxes were instituted the market was quite different and people were actually making money on their real estate investments. Now, maybe not so much. Maybe flip taxes are an additional burden on a seller who may already be economically drowning. It does not seem equitable.

I sorry I should have added that this is the way it is in our building, We are a "Net Profit". Some building could be "Dollar per Share" or "Fixed Amount". What ever it is, it is important that the bulidng is consistent with applying the same to all seller.

I just googled and found a good article in the NYT to help.

http://query.nytimes.com/gst/fullpage.html?res=980CEEDB163BF930A25757C0A9659C8B63

Our flip tax (10% of profit) was instituted when the building went coop in 1980. It was an eviction plan and the first board didn't want insider-profiteers to buy and flip. The flips go into the reserve fund and are spent on capital expenditures (including LL11 this year). We've have a lot of discussion about lowering it, but the truth is, most board members intend to stay a while and prefer the advantages of a fat reserve fund. Maintenance has risen with RE taxes and union wages but that's all: 3% - 5% a year.

Our building does require a majority of shares to change it and the board doesn't want to take the trouble (and likes the income for the reserve.) Having older people in the building means that when they eventually die, their heirs will pay huge flips. The lovely 97-year-old in 12A died a peaceful death and made a $2MM profit. It's a real advantage to younger buyers who will stay a while and profit from the new elevators, playroom, and landscaping on the roof, etc. bequeathed to them by their elderly neighbors.

trinity, that's only true if the heirs sell right? not if they just keep it.

admin, a board can force the heirs to sell. By rejecting them as buyers.

are you serious? the more i hear about co-ops, the more i'm surprised people are willing to put up with them.

I lived in both co-ops and condos, and will take co-op any time. Once you're in, you enjoy the protectionism while in a condo (very high end) there happened to be a male escort service in one unit and a Russian mobster with whores and thugs/bodyguards in another. This shit does not happen in good co-ops. Hence the heirs situation. The board might approve them, too, by the way. And mostly does.

there are simple reasons why coop are historically much cheaper than condos. The good news is that in this market there is an oversupply of huge condos, which will drive down the price of both. It remains to be seen what happens to the condo / coop premium.

Co-op is a New York phenomenon and it still holds for all this decades. For a reason, too. If it didn't make financial and social sense, the concept would've retired. Think about it.

Yes, there's only a flip tax when there's a sale. Admin is right - the heirs have to go before the board, which makes sense because all the shareholders hold the building "cooperatively" and you don't want a dud partner. Makes a stable financial environment -- there hasn't been a single crazy mortgage default in manhattan because no board would approve one. A note on history: The coop movement came out of the labor/socialist movement in NY. They were like communes for union members. There are still coops where you can't sell for more than you paid!

"The coop movement came out of the labor/socialist movement in NY. They were like communes for union members. There are still coops where you can't sell for more than you paid!"

i've read that it actually started on the artist/bohemian community, to make sure they were living with "like minded" people. funny how it shifted (if the above is true, which i'm not 100% sure about as it's coming from only 1 source).

admin, I think your artist thing is more correct. The labor/socialist movement was responsible for what they refer to as "coops" -- mostly Mitchell-Lamas and Mutual Redevelopment Houses -- but that didn't get going until WWII. Coops existed (and went bankrupt in downturns) as luxurious market-rate buildings at least since WWI. If it was an artist thing, I think they were along the lines of Des Artistes on CPW; but that's just a guess.

Probably the [uber-wealthy gentlemen- and lady-artists] wanted to keep out, you know, "theater people". Not our kind, dear.

Anyway, I'd be very curious to read a history of coops in NY. I think I once read about a large cluster of them on CPW that went bankrupt after WWI.

W. 67th St. artists' coops:
http://query.nytimes.com/gst/fullpage.html?res=9A06EFDE1F3FF936A25751C1A960958260

But this landmarking report has an earlier history, of rich people creating cache for apartment living. There's also an interesting explanation of residential hotels, and a bit about artists' studios:
http://www.nyc.gov/html/lpc/downloads/pdf/reports/140w57th.pdf