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Can That Condo Flip You Out?

Yes — at least the positive drumbeat is growing more insistent.  Condos need money just like co-ops Short of robbing a bank there are only four ways of getting it: 1) Raise the monthly charges — they can only go so high before there’s a mass revolt, 2) Impose assessments – never a popular revenue-raising method, 3) Get a loan – still harder for condos than  co-ops, or 4) Impose a flip tax.

The problem is no court has ever said it’s OK.  It’s clear co-ops can charge flip taxes.  But unlike co-ops, condos are real property so boards cannot unreasonably restrain the transfer of units. What’s “unreasonable” is anybody’s guess.  Courts have upheld the right of condos to impose non-financial restrictions on renting out and even selling.  And  judges gave thumbs up to one condo board that as a condition of waiving its right of first refusal made a buyer agree to pay a fee of 7.5% if he sold his unit within five years.

“Within the past two years increasing numbers of both co-ops and condos have turned to flip taxes as a means of raising revenue,” said real estate lawyer Phyllis Weisberg.

Marcie Waterman Murray, a lawyer with expertise in co-ops and condos, agreed that flip taxes were on the rise.  She estimated that at present about 75% of co-ops have them, compared to 25% of condos.

“Owners should vote for them because they’re a great source of revenue,” noted Stacey Max of Bellmarc Realty.

Increasingly, they’re found in new condo developments. Why? It’s a lot easier for the sponsor to stick them in the offering plan without the need to get after-the-fact owner approval. Arguably, implementing them upfront makes sense because in new construction, as opposed to converted condos or co-ops, the sponsor does not have any legal obligation to fund a cash reserve account.

Yet in this economic climate, even sponsors are thinking twice about imposing any financial burdens on buyers that might make their apartments less salable, explained Ms. Murray.

Don’t expect to see the words term “flip tax” anywhere in print. It’s a statement as retro as a broad-shouldered jacket. More likely they’ll be called transfer fees or contributions to capital, terms that have a friendlier ring. But you know what they say about a rose by any other name.  So beware.

Still, while they’re testing the legal waters, most condo boards make do with fees a lot lower than those in co-ops,  maybe hoping that such moderation will fend off any challenges.

“Transfer fees as high as 6% of sales are not uncommon in co-ops,” said Ms. Murray, “though 3% is probably closer to the norm ”  Nevertheless, she believes fees determined on a per share basis are the fairest. In contrast, in condos, fess are usually not more than 1-2% of sales.

There’s a silver lining in this financial pain. Accordingy to one CPA with whom I spoke, the the cash paid via transfer tax would be considered a capital contribution enabling the seller to increase his cost basis and decrease his sales profit, potentially reaping significant tax benefits.

One condo that was ahead of the curve is 100 U.N. Plaza in Midtown East. According to realtor Robert E. Doernberg, it imposed a 2% transfer fee four years ago as part of a regular savings plan to boost reserves.

Just because transfer fees are coming down the pike in condos doesn’t mean they’re legal. At least one attorney with whom I spoke, but didn’t want to be quoted on the issue, said she believed no matter how implemented,condo flip run afoul of the law.

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