Raising Money: The Habitat Survey

The Facts About Fees

By Jennifer V. Hughes

They say that only two things are certain in life: death and taxes. But when it comes to living in a co-op or a condo, perhaps we should add a third: fees. There are move-in/move-out fees; sublet fees; storage and bike room fees; fees for pets, parking, pools, gardens, and gyms; transfer fees (flip taxes); alteration application fees; and fees for purchase, refinancing, and subleasing. “What’s next?” jokes attorney Geoffrey Mazel, a partner at Hankin & Mazel. “Inhale and exhale fees?”

Indeed, with the use of fees on the increase, Habitat asked readers to answer a survey on the subject. The most popular fees were purchase application fees, with 78 percent of buildings charging them. The dollar amounts ranged widely, from $150 to $1,500. The least common fees were those for bike rooms and parking, with only about half of buildings ringing them up.

What should boards glean from the use of fees by their co-op and condo peers? Some boards impose fees without regard to proper procedures; others carefully follow the guidelines of their professionals. Which choice do you make – and what are the most significant facts that you should know about fees?

Reasonable Is the Word

First, know what fees you can rightfully charge. Mazel says a building’s proprietary lease will indicate whether it can legally impose fees, for what, and for how much. Most leases also have some general language that indicates that corporations can be reimbursed for “reasonable administrative fees,” notes Mazel, who adds: “That’s the catchall. Everything is an administrative fee.”

But boards also have to watch out for the word reasonable. “If you have a move-in/move-out fee that was $500, and you want to make it $5,000, I’ll tell the board, ‘You have to be careful,’” the lawyer says. In a lawsuit, the courts would probably rule against an excessive fee of that amount.

What’s a reasonable increase? At 135 Willow Owners Corporation, a 110-unit co-op in Brooklyn Heights, fees include one for moving in and moving out ($250), for a bike room ($10 per month), and for sublets (25 percent of monthly maintenance). Last year, the corporation increased the flip tax from $5 per share to $10 per share. Based on prevailing market rates, that could be considered justifiable.

“The fee had been the same since 1984, when the building went co-op,” notes Karan Spanard, the secretary. “We looked on the market and realized that many buildings were charging on a percentage basis. We wanted to keep it on a per-share basis. But if you’re taking advantage of the increase in property values, you’re taking advantage of the capital investments that went into the building. We wanted to take it from them on the way out, rather than taking it from the people who are here every single month.”

In making the change, the corporation also stipulated that it could use up to 50 percent of the flip tax for the operating budget. “That gives us a nice cushion in this environment where the property taxes just don’t stop going up and energy costs fluctuate so much,” she explains. All told, the corporation sees about $120,000 annually from fees, most of that from parking, out of a $1.35 million budget. “They are nice to have, but we don’t budget against them.”

The Democratic Fees

The way the Willow Owners Corporation increased its flip tax was to amend the proprietary lease, a move that generally takes the support of shareholders who represent two-thirds of the outstanding shares.

Under the old system, the average one-bedroom with 1,000 shares carried a fee of $5,000. But that fee hadn’t changed in years: it was $5,000 when apartments cost $80,000 and it was $5,000 when the units were going for seven times that much. So, an increase was fair, given the rise in property values. The new fees brought a transfer fee to $10,000 on that average one-bedroom. “That’s not going to make or break the deal,” Spanard says. “It’s something the seller just has to figure into their asking price.”

Amending the proprietary lease is the “gold standard” of increasing fees, says attorney Marcie Waterman Murray, a principal in Tane, Waterman & Wurtzel. But Murray says she could envision a situation where a board decides it doesn’t want to go to shareholders, who might be reluctant. A board could amend the bylaws – a move that requires only a majority board vote – and institute a dollar-amount per-share flip tax. The Business Corporation Law, Section 501 permits corporations generally to have more than one class of shares but requires all shares within a class to have equal rights as compared to all other shares of that class.

“If you have 250 shares in your apartment, and I have 25 shares in mine, but the flip tax is a percentage of profit and my apartment sells for more than yours, I pay a larger flip tax even though I have fewer shares,” says Murray. Under the BCL, that would create unequal rights among shares in the same class and be unenforceable if authorized solely in the bylaws. It would be legal only if authorized in the proprietary lease, occupancy agreements, offering plans, or amendments to those documents.

Going to the bylaws is not a move that Murray recommends because the contract between the corporation and the shareholder is the proprietary lease. The bylaws are the rules for running the corporation.

“Courts, in general, don’t like financial impositions without specific authority. The bottom line is that if you want to put a financial imposition on your shareholders that is not specifically provided for in your original corporate documents, the [best way] is to amend the proprietary lease.”

Bylaws may reflect financial impositions on shareholders, but Murray says they should be just mirror images of what is already in the proprietary lease. If the fees are in the original bylaws, however, a court is more likely to support them than if they are added later on – particularly if the later amendment was only by board vote.

Murray says she believes that co-ops and condos still impose fees without using the proper legal authority, such as amending the lease or looking to the original lease or bylaw language. For example, some boards might think that because the lease or bylaws give them the specific right to impose closing fees, they can impose additional fees, like late fees for tardy maintenance payments, or sublet fees. They may get away with it because shareholders or unit-owners think the actions are fair, so they don’t make a fuss about it. But boards should take nothing for granted and check with their governing documents and/or their professionals to be certain they are on firm legal ground.

Who Gets a Fee?

One of the issues about fees is who gets them. At 127-129-131 West 96th Street Owners Corporation, some fees – like the storage, sublet, transfer, and bike and laundry room fees – are paid to the corporation. Others – like the purchase, alteration application, and refinancing fees – go to the managing agent.

This can be a source of friction, says Ruth Shoenthal, board treasurer at the 128-unit building. Over the past few years the amount of the fee for refinancing has increased from about $350 to as high as $675, depending on the type of loan. “I found out about this when I was starting a refinancing just recently, and I was not pleased,” she notes. “We feel our fees are extremely high. We want to work with them to see what we can do.”

A few years ago, the board increased the amount for late fees for maintenance payments. Shoenthal says the lease stipulates “reasonable” late fees, so the board had the latitude to increase them on its own from $25 a month to fees that rise from $50 to $250 depending on the number of infractions. In all, the money the corporation expects to earn from fees for 2011 is about $32,500. “That’s out of a budget of more than $1 million, so you can see it’s really de minimus,” she says.

The board doesn’t count on flip taxes and late fees because there is no way to predict the amount. Indeed: everyone agrees that boards should not rely on fees to make ends meet.

If they are trying to balance their budget out of fees, then that is simply bad budgeting.

Although boards should not rely on fees, such income can be a welcome addition. Cynthia Graffeo, a management executive of Buchbinder & Warren, reports that one of the buildings in her portfolio has a sublet fee of $12 per share. “If there are two or more sublets, it can be a good amount of money,” she says. Another building has an administrative fee of $2,000 for transferring a unit. “That co-op has 24 apartments, and last year there were three unit transfers. That’s a substantial amount of money.”

Now if only you could figure out how to impose a fee on inhaling and exhaling... n

The State of the Flip

By Bendix Anderson

Talk about rough timing: as apartment prices began to fall four years ago, one local co-op property created a flip tax, a fee on any apartment sales at the property equal to one percent of the sales price. Then, as the sagging real estate market began to collapse, the co-op increased the flip tax to two percent. It’s notoriously difficult to get shareholders to vote for a flip tax, even in good times. But in a poor market, why do anything that might inhibit sales?

“There were those who were vehemently against it,” says the co-op’s president, who preferred not to identify her building. However, fiscal realities helped convince the shareholders to vote for it. “We needed a new roof,” she admits.

A growing number of co-ops are considering creating or expanding flip taxes as they struggle to replenish reserve accounts depleted by rising costs. An exclusive survey commissioned by Habitat found that close to two-thirds of responding co-op boards already have some kind of flip tax or transfer fee in place. Board members and local real estate experts say the number of buildings that charge a flip tax is growing fast.

The Habitat Survey

A total of 186 co-op boards responded to the Habitat survey. Of those, more than 129 charge some kind of fee paid by the seller of a co-op apartment when the unit is sold. Co-op boards might call it a transfer fee or an administrative fee, but most experts refer to the charge as a “flip tax.” (The survey focused on cooperative apartment properties, since flip taxes are still extremely rare at condominium properties.)

So far, some boards have resisted the temptation: close to a third of the 186 respondents, or more than 57 co-op boards, report that they do not charge a flip tax.

Such resistance was especially strong during the real estate boom. Many new co-op shareholders treated their apartments as investments, and fought anything that would cut into their yield. “People would say, ‘Oh you’re crazy! How dare you?’” recalls Steve Greenbaum, director of property management for Mark Greenberg Real Estate.

As property values fell, most shareholders became less focused on short-term profit and more focused on the long-term capital needs and financial stability of their home.

“People who sell always question the flip tax; people who stay never do,” says Kirby Lindell, vice president of the board at Bell Park Manor Terrace, an 850-unit property that has had an aggressive flip tax in place for two decades.

Rising property taxes and fuel costs make it more difficult for co-op boards to find money to replenish their reserve accounts. But reserve accounts will need to be full to pay for capital expenditures like new roofing or brickwork. If the money isn’t there, the co-op board might have to raise the maintenance. A flip tax can be a useful alternative.

“A couple dozen of our buildings may be looking at the issue,” says Dan Wurtzel, president of Cooper Square Realty, which manages 400 properties totaling more than 60,000 cooperative, rental, and condominium apartments.

Flip taxes don’t have to have a negative effect on property sales, provided the fee is not more onerous than flip taxes at comparable properties, according to local real estate brokers. One co-op board on the Upper West Side proved the point by studying 10 comparable doorman buildings within 10 blocks of their own property. “Sales prices at our building were not any better because we had no flip tax,” says Greenbaum.

Agreeing to Flip

Once a co-op board decides to consider a flip tax, there seems to be broad agreement about what type of flip tax members might consider. “Two percent of the total sales price of an apartment seems to be the number that everybody likes,” says property manager Gerard J. Picaso, president of Gerard J. Picaso Inc. This percentage seems just high enough to make a positive difference for a building’s reserve account and just small enough to feel manageable.

Other options include a two percent flip tax on the profit taken by a co-op seller. In such a situation, if an owner bought the apartment for $400,000 and sold it a few years later for $500,000, the transfer fee would be a percentage of the $100,000 profit.

Property managers warn that this type of flip tax can become complicated if sellers are allowed to subtract renovations or other expenses from the profit. Sellers often claim to have spent thousands of dollars years before, though they may not have receipts, and it may not be clear which improvements qualify. “You have to explain that painting the apartment doesn’t count,” warns Picaso.

Other co-op boards may consider a flip tax based on the number of shares sold in a transaction. The sale of an apartment that represents 40 shares will generate the same flip tax in good times and bad. However, this kind of flip tax is still vulnerable to real estate recessions in which fewer apartments are sold overall. It also does not account for inflation.

Consequently, some boards are attempting to change it. “We tried to do it twice,” says Stanley Greenberg, an accountant and board member for LeHavre, a co-op with more than 1,000 apartments in Queens, N.Y., with a flip tax of $1 per share, or a maximum of $800. That might have been a lot of money back in 1984, when the building converted. But it’s nowhere near enough to pay the $35 million cost of recent repairs and construction.

Creating or changing a flip tax is devilishly difficult. Most cooperative properties require a super-majority of two-thirds of shareholders to vote in favor of a flip tax. That can be hard to come by, especially considering that two-thirds of the owners might not even attend annual meetings or return mail-in ballots.

“It’s the apathy – you just don’t get people to vote,” says Greenberg. Less than half of the shareholders at LeHavre bothered to vote on the flip tax proposals. Instead, the co-op has had to raise its maintenance charges, including a recent 2.5 percent increase.

The difficulty of creating or changing flip taxes helps to explain why they are so varied. Habitat’s survey found a huge range in the method of charging flip taxes in cooperative buildings across the city.

One 900-unit property in Morningside Heights charges a whopping 15 percent of the net profit of an apartment sale. Another property charges just $2 per share. Still another charges a five percent flip tax that drops by one percent for every year that the owner has owned the apartment before selling it.

Many of these flip taxes were created decades ago by the original co-op sponsors, who had a lot of freedom as to what kind of flip tax they created. They didn’t have to pay the flip tax themselves. They certainly didn’t have to worry about getting a super-majority of shareholders, since they owned all the shares.

One type of flip tax has fallen out of favor: a charge meant to supply a significant part of a property’s operating budget. Although most flip taxes are designed to make this illegal, managers say that some buildings did not listen to their professionals who warned against the danger of depending on flip income for day-to-day expenses. Properties that depend on flip taxes to pay for their heating oil or electricity bills will eventually hit a year like 2009, when none of their apartments sold and they derived no income from the flip tax. “It’s like fiscal suicide,” observes Michael Wolfe, president of Midboro Management.

Indeed, as many have subsequently realized through sad experience, in boom times, flip income is gravy. But in bad times, it’s not gravy – it’s just not there.