Flexing Muscles

When the owners of a small, 47-unit Park Avenue condominium wanted to generate money without increasing their common charges, the board of directors came up with a novel idea for a condominium: imposing a transfer fee on the sale of all units.

Transfer fees, or flip taxes, have long been a way of life for cooperatives, which have used them to generate cash for the reserve fund. But to date, the practice has been unusual – and rare – for condominiums.

The reason, says attorney Richard Siegler, a partner with Stroock & Stroock & Lavan, is that lawyers have moved cautiously to interpret real property law, which holds that it is illegal to put impediments on the “alienation” (or sale) of real property.

But that trend is changing.

More and more, observe property managers, and real estate attorneys, condominium boards are flexing their muscles, limiting subleasing (sometimes banning it) and exercising their right of first refusal to control the sale of units in the buildings.
While the courts have upheld the limits on subleasing and the exercise of the right of first refusal, there is no language in the condominium act, Article 9-b of the Real Property law that specifically allows the institution of a transfer fee, notes Siegler. “But while there is nothing there that says a condominium board can institute a transfer fee, it also does not specifically prohibit such a provision,” adds the attorney, who helped the Park Avenue condo draft a bylaw amendment to institute the transfer fee two years ago.

For Siegler, it’s time to push the envelope, particularly given the number of new condominiums created within the past five years that are experiencing a cash crunch, because of renovation or construction problems in a building. As Siegler points out: “Courts have started to recognize that condominiums, like cooperatives, necessitate [having] a balance between individual rights and protections and the communal rights and protections inherent in such entities.” In light of these rulings – where the courts have upheld restrictions on leasing in condominiums, and have permitted boards to exercise the right of first refusal in the sale of a condominium, “it is foreseeable that a condominium transfer fee would be upheld.”

At the Park Avenue condominium, the board of directors decided to take that risk two years ago, and instituted a one percent transfer fee, raised to two percent this past year. The fee was not without its detractors, however, particularly from unit-owners who argued that the fee, to be paid by the purchaser, would probably result in a downward negotiation of the sales price of their units. But after a lengthy annual meeting in 2003 – kept open while supporters of the transfer fee collected proxies for the two-thirds vote needed to pass the bylaw amendment – most of the unit-owners have come to see the necessity of the transfer fee, observes John Janangelo, president of Bellmarc Property Management, which manages the building.

Already, says Janangelo, he has another luxury condominium in downtown Manhattan that is considering the same amendment to its bylaws. The reason? “The problem with many new buildings is that they don’t start with any money – there is no reserve, and no way to generate money.”

As a result, the unit-owners are required to raise the common charges. In an expensive building, however, condominium boards are loath to raise their own common charges. At the Park Avenue condo, “this board said they were accustomed to have a flip tax in a co-op,” says Janangelo, so the board’s attitude was, “‘Let’s put it in.’ Even though the concept was rather novel, we went ahead and did it.”

To pass the transfer tax, the board took a “good cop/bad cop” approach to the transfer fee: presenting it as an idea on which they would brook no challenge, while at the same time keeping the transfer fee low – one percent – to get people comfortable with the idea. Then they had to sit back and wait, as the votes were counted.

“We kept the meeting open while we collected additional votes in favor of it, and then we adopted it,” recalls Janangelo. “Last year, we did another amendment [to raise the transfer tax] from one percent to two percent.”
There were trade-offs. While the building is now about to offset increases with money from unit sales, condominium owners may get less than their asking price, if buyers balk at the transfer tax. One way or another, “it’s going to affect the sales price,” Janangelo acknowledges. But at the same, he maintains, having that “cushion” is a good idea.

“I think there is a great deal of misinformation about it, and something that needs to be promoted,” adds Siegler, pointing out that a condo transfer fee couldn’t only help keep down common charges, but also help build a tidy reserve fund for a building. While the condo transfer fee’s legality is not “100 percent free of doubt,” it has a good chance of holding up in court if challenged.

“If the transfer fee authorization is added as an amendment to the bylaws, with a two-thirds approval vote commonly found in New York co-op and condominium entities,” continues the attorney, “it would arguably carry a similar presumption of validity, because of the overwhelming approval of the unit-owners.”