Assess on a yearly basis and everyone who owns shares of an apartment pays for current and future capital improvements. After all today's capital improvements may be attributed to be the "legacy" of those who sold before.

If reserve funds are important in sales, then even if shareholders do not partake of future improvements, they are partakers of the "attrative" value of its reserve funds thanks to everyone's contribution to the "offertory box."

Just like you, I am not a fan of flip taxes. I would only impose it in those cases where people flip a unit in less than 2 years in a high market.

AdC

Ah, besides funding the building, flip tax is to prevent investment flippers. Ok, then flip tax can be assessed on a proration basis (ie sales on 1 year ownership 3%, on 2 years 2%, on 3 years 1%, thereafter 0%). And, in most likely case, monthly maintenance would have increased to continue to support the co-operative. Maintence charge is for the purpose of paying current and reserving for future expenditures. Lack of budgeting know-how and money squandering is mismanagement. Anyway ,I still feel that flip tax is a farse.

Flip taxes have never been my cup of tea. Perhaps for certain buildings and real estate markets it may be fine, but not for others. The "cookie cutter" mentality should be broken and adopt what makes sense to your particular building and for the particular moment in history.

For example: (1) A building with a high sponsor representation should not have flip taxes. Who do you support? The sponsor. Assessments would be the logical way to go in order to have the sponsor pay too. However, board must check their by-laws to find out if they have the right to assess unilateraly or if they need the sponsor's blessing.

(2) Apartmsnt buildings with small number of sales a year should not have a flip tax. Why? What is the money that you expect to collect that will add significantly to your coffers.

(3) Bad markets - Rethinking of a flip tax becomes mandatory.

To call shareholders greedy for not instituting a flip tax is absolutely ridiculous. If you were to assess, everyone contributes and those who flip will surely will pay for what will come in the future.

Finally, assessments and flip taxes are negotiated among sellers and buyers. A buyer may opt to pay for remaining assessments or demand from the buyer to pay depending again on the market. The same goes for flip taxes - who pays is subordinated to how much you want an apartment or how much you want to sell.

So, a free market mentality is important to preserve, but at the same time re-think what makes sense for the common good of an entire building.

AdC

AdC, even a small number of sales per year in a smaller (45 unit) building can have significant impact, especially when the flip tax is a percentage of the sale price and prices are rising.

But, I am not convinced. I believe in the system of paying for what you consume, i.e., an assessment is healthier as it makes shareholders partakers of the improvements and beneficiaries of a stronger reserve if this is part of the issue.

We have sublet fees, but in reality have been used to subsidize maintenance. Then, the problem becomes for the shareholders who remain a two way street: low maintenance due to higher # of sublets as well as problems created with banks and type of perception on the building, or higher maintenance bu with a stable population of residents with better appreciation for their own property. (Note, perhaps at times - as not all renters are inconsiderate to property or rules)

As I mentioned, the cookie mentality does not fit all. Use the best business judgment when trying to institute a flip tax.

In your case of 45 units where 2 only sell a year, and depending on the price demanded by the unit and % used, to raise $10,000 or $20,000 may mean so much to your reserves in a good year and $7,000 the next year. It is just like interests in a bank account. Not a reliable source to make a hugh impact. In fact Ted,NJ's co-op has assessments every year as part of their strategy and everyone boasts of how well his building is doing. This is call commitment to a property and to the place to call HOME!

AdC

You're right that a cookie-cutter approach will never work.

Except when making cookies. : )

Hi, AdC,

Don't make the mistake of thinking that income from flip taxes is expected or part of the budget. In fact, no CPA will permit you to include flip tax revenues in a projected budget (because doing so is prohibited by generally accepted accounting practices).

Instead, think of flip tax revenue as extra money that can go to reducing the amount shareholders have to be charged for a new roof/boiler/elevator.

As for other comments about the need for a flip tax, I think that many people misunderstand how some co-ops (and mine) come to have one.

Our co-op had no reserves. Zero reserves hurts sales. Zero reserves hurt the corporation. Zero reserves leaves the shareholders to open their checkbooks when capital improvements are needed. So the board said, We need reserves!

The board explained that we can either pay a little at a time through a maintenance increase, or we can have sellers pay a portion of their selling price to the corporation. (Think of it as a way for the co-op to get back a little bit of what the co-op did to improve the building while the shareholder was a resident).

Our shareholders opted for a flip tax. As a former treasurer, I'd rather have the income as maintenance because it's constant and it's part of the budget. But the shareholders spoke, and the board listened.

Finally, for those who are opposed to a flip tax because they think it leads to mismanagement: This kind of argument is a red herring. If your business is being mismanaged, it's not because there's a flip tax. (Enron didn't go down in flames because it was trading in energy futures; it went down because it did so corruptly and left lots of tracks.)

If you think there's mismanagement on your board, run for office!

Hey Steve,

You say, "Finally, for those who are opposed to a flip tax because they think it leads to mismanagement: This kind of argument is a red herring. If your business is being mismanaged, it's not because there's a flip tax. (Enron didn't go down in flames because it was trading in energy futures; it went down because it did so corruptly and left lots of tracks."

You misunderstood, flip tax is a result of mismanagement.

My statement of not "supposed to be" reliable source of income was taken out of context, since I established a comparison between "interest rates" and "flip taxes" are ot being "reliable."

However, your accountant has to account for monies that flow in and out of your operating account into reserves, etc by way of your income statement.

Your statement, "Instead, think of flip tax revenue as extra money that can go to reducing the amount shareholders have to be charged for a new roof/boiler/elevator" is not truly accurate either. The money that you receive through flip tax is accounted by way of your income statement as part of a "flip tax line item." The surplus in your income statement is then converted to "Reserves" for your "Capital Expenses."

However, should your taxes be higher than expected or your oerating expenses suffer an unexpected increase, your "reserves" need to be move to "patch the hole." Then, it's up to the board to determine if to access for the deficit or just use the reserves without inconveniencing your shareholders.

And as Lily Tomblin used to say (Watch out!, I'm dating myself), THIS IS THE TRUTH, PRUURRR!

AdC

Hi, Anon 7:58,

I don't understand why a "flip tax is a result of mismanagement."

This seems to be the syllogism you're using: Flip taxes are enacted by co-ops. Some co-ops are mismanaged. Therefore, flip taxes cause mismanagement.

Mismanagement comes from all sorts of causes. Poorly trained board members, inadequate supervision of staff, shareholders who refrain from their oversight responsibilities.

Income does not cause mismanagement. That's not to say that people won't be tempted to dip into a pile of cash. But notice the difference: money (whether from the laundry machines, insurance settlements or a flip tax) is one means to mismanagement. Money does not cause mismanagement. It's just a darned good incentive for the unscrupulous.

Can you explain why you find a flip tax to be so bothersome? Not on subjective grounds -- no one *likes* paying more, even if it's for a new sidewalk that benefits everyone. I'm looking for an objective reason to back up your claim.

Personally, I'd be happy to do away with the flip tax in my building if we could have a higher maintenance fee. After all, our maintenance fees are in the lower third of maintenance rates for our borough, and just at the average rate for our neighborhood (which likewise is lower than the average).

Buildings on Park Avenue with wealthy shareholders can afford to charge high maintenance fees to cover all their costs AND to build healthy reserves; other buildings may enance a perpetual assessment to do the same.

Any way you look at it, X amount of revenue has to come in. Whether the shareholders want it to come from 1 source or 7 sources doesn't reflect on the board's quality or ability. (In fact, if you ask financial people -- of which I am not one -- most would tell you that having a broad base of income is safer than having a narrow base, such as relying only on maintenance.)

Money may be the root of all evil, but it takes corrupt people to mismanage it.

Hi, AdC,

Thanks for the thoughtful response.

I certainly didn't mean to take your comment about a reliabe source of income out of context. My apologies.

My point was that flip tax income cannot be used in income projections (i.e. the budget). Yes, the accountant records flip tax income, but only after the fact. That's what you're referring to (the income statement). The budget, of course, attempts to foresee the future, and the GAAP prohibit using an income source as capricious as flip taxes in a corporation's planning.

You point out: "The money that you receive through flip tax is accounted by way of your income statement as part of a 'flip tax line item.' The surplus in your income statement is then converted to 'Reserves' for your 'Capital Expenses.' "

That's what I was trying to say. Money from the flip tax comes in, is assigned a category by the accountant (and accountants do love categories), and is placed in the reserves account. I could have been clearer: The amendment to the proprietary lease that approves the flip tax can require that flip tax income be used only for capital improvement (as it is in my building).

"However, should your taxes be higher than expected or your oerating expenses suffer an unexpected increase, your 'reserves' need to be move to 'patch the hole.' Then, it's up to the board to determine if to access for the deficit or just use the reserves without inconveniencing your shareholders."

Yes, exactly! The higher the reserves, of course, the less likely shareholders will have to be bothered by yet another dreaded assessment. Which is why our shareholders are pleased to have a healthy reserves account -- funded by their flip tax.

"And as Lily Tomlin used to say (Watch out!, I'm dating myself), THIS IS THE TRUTH, PRUURRR!"

She's a national treasure!

However, the bottomline here is, your philosophy is different from mine. How we raise reserves is seen in two different perspectives.

I'm glad you defend flip taxes. Someone may find it beneficial. To me, I only see flip taxes as a contribution by those who flip, i.e., investors who only want to reap a gain in 3mo to 24 months.

As I reiterated, every board must do an analysis of their situation and use whatever FITS their philosophy and builidng situation. To make converts of one religion will take the reachness away of dialog.

Thank you for enlightening those who may have followed the exchange.

AdC

I believe in your premise that flip taxes should be used for reserves and not for current expenses - unfortunately our coop depends on the flip tax for maintenance expenses -but of course we have major problems regarding where our money goes - However, if you have already received income during the budget period from flip taxes - how can you not include it in the budget since it is income to the corporation - the problem is to protect this source of income and make sure it goes to reserves - and in our small coop it is a great source of income because so many many shareholders move each year - but of course that is because we have major increases and assessments each year and nothing goes toward the building

Hi, J,

Thanks for your comments. I'll respond to them as best I can.

> unfortunately our coop depends on the flip tax for maintenance expenses

It's awfully easy for that to happen, especially when maintenance fees are too low to support the co-op's entire costs. (I'm assuming your co-op is run on the up-and-up.)

In our co-op, the resolution that shareholders passed to approve the flip tax requires that flip tax income be used exclusively for capital improvements.

(As an aside, if you live in Manhattan and want to find out if your maintenance is high or low, search in the field at the top of this screen for "maint fee comps" and open the message dated Friday, April 13.)

> -but of course we have major problems regarding where our money goes -

I'll take your word for that.

> However, if you have already received income during the budget period from flip taxes - how can you not include it in the budget since it is income to the corporation

The reason is in terminology.

Let's say your fiscal year is the calendar year. Around November, then, you'll be preparing your 2008 budget of expected income and expenses. Your accountant will ask you to predict your maintenance income and fuel costs, but he/she will not allow you to include your predicted flip tax income. Your budget is then completed and approved in, say, December 2007, before 2008 begins.

When flip tax income arrives in 2008, it doesn't go in the budget because the budget is already final. (It's not a living document: once it's approved, in the previous year, you don't change it. You may, of course, make adjustments in spending based on changes that happen in 2008. But the budget itself doesn't change.)

The revenue shows up on your income statement, which your accountant will prepare in January 2009.

In other words, flip tax income shows up AFTER it is received. Income from maintenance, the laundry room, storage cages and the like are predicted BEFORE it is received.

Remember, a budget is a prediction. An income statement reflects fact.

> - the problem is to protect this source of income and make sure it goes to reserves - and in our small coop it is a great source of income because so many many shareholders move each year - but of course that is because we have major increases and assessments each year and nothing goes toward the building

That sounds like a problem. If you're increasing the maintenance (I think that's what you're referring to) and implementing assessments each year and still "nothing goes toward the building," I assume that all that revenue goes to paying your bills. Either your expenses need to be reined in or, if they are already, you need more income.

(This idea that money can always be cut and that any increase in income means skimming or profiteering is going on is the same reason the U.S. won't pay for poor children's health care and why New Orleans is still an utter mess. The truth is that if you want things improved, you have to pay for them.
(Of course, some organizations are run by the unscrupulous. Enron comes to mind.)

Oops! The search field is on the main Board Talk page, not the message page. Sorry for the confusion.

How large is your co-op (how many units)?
Where is it located (Midtown? UWS? DUMBO? LIC?)
How old is the building?
How many staff do you have?
What's the "average" maintenance fee?

If you can supply this info, we might have a better snapshot of your problem....

RLM

"Flip tax is a RESULT of mismanagement"?

I disagree strongly.

Each co-op has highly individual problems. Some are rich with only 8 units and 10 staff; others are poor with 45 units and 1 staff.

Beginnings are critical. If the building was in good financial shape and had a motivated sponsor, it's probably in great shape now; if it was financial tenuous and had a sponsor and new Shareholders treading water, it's probably still a bit shaky.

Maybe Shareholders in YOUR area can afford $5000 per month average maintenance fees; ours won't support that much (thank the heavens!) - and maybe YOUR building is newer and requires less work to keep it running (unlike our 100-year-old beauty). Maybe you even have commercial space which supplements your "good" income; we're zoned so we can't have ANY.

Generalizations such as yours are counter-productive and serve only to make newbie Board Members (and even veterans) feel badly about their own co-op.

But maybe that's why you chose to remain "anonymous"?

- RLM

In a way, flip taxes are similar to capital gains taxes.

You buy shares, you sell them. When you sell, you pay a percentage of the sale price (or the profit, or however your co-op has arranged it).

Essentially, the seller makes a profit -- so why shouldn't the co-op benefit, especially if it puts the funds into capital improvements?

Wish "regular" businesses would do the same, rather than throwing it at investors to shore up the company's value on the stock market.

RLM,

You say, ""Flip tax is a RESULT of mismanagement"?

I disagree strongly.

Each co-op has highly individual problems. Some are rich with only 8 units and 10 staff; others are poor with 45 units and 1 staff."

Uh, overstaffing and understaffing IS mismanagement. I know you were giving an example, but nevertheless, it is still mismanagement.

Can you please give me a more specific link to the Comparison of Maintenance Charge you referrred to.

I look on the Board Talk page and did not see it.

Thanks for your help

Howard

Please, give me a break. To compare flip taxes to capital gains is rather ridiculous. Flip taxes may have to be adjusted according to market. Sometimes, a shareholder may be losing money depending on market. So, because we are living at the end of an upcoming market that have lasted seven years (2000 to 2007) in some areas, don't tell me that everyone is every selling is making money.

Again, I repeat my sentence, "don't try to make converts of one religion." Co-ops should be free to adopt the BEST method under their BEST BUSINESS JUDGMENT to increase their reserves. To use FLIP TAX, ASSESSMENT or other sorts of FEES to increase your revenue is a matter of analyzing and adoptng what is good for the co-op and its shareholders.

AdC

Hi, Lefty,

I'll do you one better: Here's my post from April on maintenance fee comps in Manhattan. (If you want to find the original, I typed in the search field "maint fee comps." That brought up three posts. Select the one from April 13, 2007.)

The references are to the original poster's question and the data she supplied.

Cheers!

* * * * * * * * *

Let me discuss [the poster's] original question first: Is $6.40 per share too high for a maintenance fee? It's impossible to give an answer to that question. Many people assume that one share in your building is equal to one share in my building, and equal to one share in every other co-op in the five boroughs.

It's not. Thanks to the wisdom of the lawyers who draw up co-op papers and the staff of the attorney general's office, which blesses those papers, the number of shares in a co-op corporation is arbitrary. For example, your 86-unit co-op has 19,760 shares. My co-op has 43 units and about 26,000 shares. So you can see that the price per share cannot be used for comparisons among co-ops.

So how do we measure one to another?

The way I do it -- and I'm no statistician, just a board treasurer who got tired of the complaints about our maintenance fee being "the highest in Manhattan" -- is to look at the monthly maintenance paid (in dollars -- NOT in shares) and divide it by the size of the apartment (in square feet). So, for example, if Alex pays $1200 a month in maintenance for an apartment that's 900 square feet, she's paying $1.50 per square foot.

1200 / 900 = 1.5

The weakness of this comparison is that it does not take into account tangibles (doorman or not, health club or not, basement apt vs penthouse) or intangibles (grand or dingy lobby, pre-war or modern, how recent the renovation, "fixer-upper" vs "move in tomorrow"). The strength is that it's quick and easy, especially because figuring out which building has which amenities is a challenge.

I decided to find out the average maintenance price in Manhattan co-ops by neighborhood. My source is a feature in the Sunday Real Estate section of The New York Times. If you're familiar with the paper, you've seen the "Sales Across the Region" grid. The top row always shows Manhattan sales. For 24 months (October 17, 2004, through October 15, 2006) I recorded every Manhattan co-op sale (not cond-op or anything else) by area (square footage), monthly maintenance, and neighborhood.

Here are the results. They include only those neighborhoods with at least five sales during that period in The Times. From most expensive co-op neighborhood to least, by square feet:

Midtown East: $1.42 per square foot
Murray Hill $1.40
Upper East Side: $1.36
Midtown West: $1.33
Chelsea: $1.25
Greenwich Village: $1.17
Grammercy Park: $1.07
East Village: $1.07 (tie)
Upper West Side*: $0.98
SoHo: $0.97
TriBeCa: $0.87
Hudson Heights: $0.86
Morningside Heights: $0.86 (tie)
Hamilton Heights: $0.75
Inwood: $0.73
Washington Heights: $0.70
Harlem: $0.51

*I included "West Side" sales with "Upper West Side."

So to answer your question (finally!), is your maintenance too high? Let's take a look.

You own 324 shares at $6.24 per share. That's $2022 monthly maintenance (rounded up). Your apartment's size is 1650 square feet.

2022 / 1650 = $1.225 (call it $1.23) per square foot

You live on the Upper West Side, where the average monthly maintenance is about 98 cents per square foot. So it's quite a bit higher than the average for your neighborhood.

But before you boil over, let's look at your entire building. It has 19,760 shares at $6.24 each, for a total monthly rent roll (that's the legal term, since in a co-op we rent from the corporation) of $123,302.40. You point out that according to Property Shark, the total residential area in the building is 121,313 square feet.

123,302.40 / 121,313 = $1.016 (call it $1.02) per square foot

That's four cents per square foot above your neighborhood average. (Or, to be more precise, 3.6 cents above.) So I would say that your building is neither too high nor too low, but basically spot-on.

Unfortunately for you, you live an apartment that has disproportionately more shares than your building's average. That means there's some lucky shareholder in your building who has many fewer shares! How are shares allocated? That's another story -- but in short, it's arbitrary, based on such things as the view, the number of bathrooms and bedroom, and so forth.

(Let me add that in the case of my figure for the UWS average, it's based on 57 sales. The most expensive I found on the UWS and West Side was $1.70 per square foot. I don't write down the addresses, but if you're curious look in The Times of Feb. 12, 2006. The least expensive was 57 cents, in The Times of one week earlier.)

If hope you find this useful. It sure taught me a lot about maintenance fees in the city.

In case you're wondering, I discovered that my building does not, as one shareholder put it, have the most expensive fee in Manhattan. It's 88 cents per square foot, which puts us in the middle third, in between SoHo and TriBeCa.

Cheers!
steve

Wow!
Thanks Steve.
You are a gentleman and I would like you to be my guest for lunch.

My e:mail is Exitement@aol.com

Howard

I'm glad you find the info helpful! And thanks for the lunch offer. I'm getting ready to leave on a nice vacation, so I'll take a rain check. Enjoy your summer!

The answer to your questions is very simple - money disappears - not how many staff, etc - money is taken out of our disbursement ledger stating that it is paying for xxxx - but that is not true - and I am not dealing with petty cash - try $100,000+ a year, and in addition unfortunately capital improvements somehow cost double what the original contract was and that was more than it should have -

There are plenty of ways to raise money in a co-op. Just because there's a flip tax, it doesn't mean that funds are poorly managed.

In my building, for example, the shareholders want the lowest maintenance we can get away with. One way to keep monthly maintenance low is to impose an assessment -- one that's open-ended, so it doesn't terminate. Looks good on paper ("Hey, that's low maintenance!") but it's another fee you have to pay.

Another way is a flip tax.

Alternatively, we could eliminate the flip tax and increase the maintenance to make up the difference.

Just like you, a corporation needs money to pay its bill. Think of income from the maintenance fee as your salary from a regular job. Think of flip tax income as freelance work on the side. Together, you have enough to pay your bills, and maybe some to save for retirement. But if you want to stop freelancing, you have to ask for a raise or cut back on retirement savings.

One reason our shareholders passed a flip tax - and then passed an increase in its amount a year later -- was the board's selling point. They explained that when the shareholders kick in to improve the building (new lobby, new boiler, adding a porter), sellers benefit the most because their apartments are worth more when they sell.

But the shareholders who stay don't see a financial benefit (just the practical one).

With a flip tax, however, even the shareholders who don't move away for decades can realize the financial benefit of paying for improvements.

Sure, the flip tax can be a drag on sales. So can the purchase process in New York City. But if you're in a well-run building, and especially if you're in Manhattan, the only drag on sales will be from the next great depression. Even after 9/11, apartment prices kept going up.

Why have flip tax when you have service contracts, warranties, and insurance? All budgetable.

I know that there's insurance for "business disruption". If a boiler breaks down or if there's a blackout, would these be categorized as business disruption? After all, a co-op is deemed to be in the business of habitability.

"Why have flip tax when you have service contracts, warranties, and insurance? All budgetable."

Yes, Anonymous, those are all budgetable. But if your budget equals income, then you cannot budget for capital improvements without A) raiding the reserves (which is OK, but a drain nonetheless) or B) imposing an assessment.

Flip tax income, on the other hand, is NOT included in the budget (under generally accepted accounting practices). Your accountant will not permit it. Therefore, income from flip taxes is extra money that can be applied to a new boiler (or whatever) without having to raise the money from shareholders.

"I know that there's insurance for "business disruption". If a boiler breaks down or if there's a blackout, would these be categorized as business disruption?"

Well, if the boiler breaks it won't be covered by insurance. Maybe the problems it causes will be, but boilers wear out. And then you have to buy a new one.

And even if you found a way to get your insurance agent to cover the cost, your rates will go way up next year. Or the agent will drop you because you're a high risk. And that, as your high school guidance counselor said, goes on your permanent record: other insurance companies can find out that info. So it's a long-term expense for the co-op.

(Insurance for a business is just like insurance for a car or the policy that covers your camera. Every time you get in an accident or lose your camera and file a claim, your rates go up. Do it often enough, your insurer will drop you. Remember, insurance agents have to make a profit too.)

But a co-op also must meet rising financial obligations. Shs will get tired of the building always going into their pockets for extra money. There have to be other ways to generate revenue other than maintenance increases and assessments. You have fund raising and flip taxes. Any other ways to generate funds?

I wonder if donations is an option. Is there a tax deduction classified as a charitable contribution? Because, after all, a co-op is a not-for-profit corporation.

I was told by the Board President that since we were not a charity, no donations could be tax deductible. But it is a good question and she is not a tax expert.

I agree with your assessment
the co-op or condo appreciated and made it possible for the enormous profit you as a seller are about to take. Have your buyer pay the flip tax because they will benefit from it more than you will.

In my building all the original buyers paid the flip tax, we didn't have a choice either. Why should we pay another flip tax and then leave the building? Let the new owners pay the flip tax just as we did.

V,

Can flip tax be transferred to a buyer? I didn't know that. I guess that will work at a sought after building or neighborhood.

Darius

In our co-op, the initial buyers all paid transfer fees. So they put language in the proprietary lease starting the the flip tax would be either paid by the buyer or split between buyer and seller.