Depending on Flip Taxes: Bad Bet or Sure Thing?

Let's look at the co-op that Lovett's Kornfeld manages.

Because the flip was drafted during the building's 1980s conversion — and so did not need shareholder approval — it contained an unusual feature: It was set at ten percent of the difference between the purchase price and the sale price. "A lot of [the shareholders] are original buyers of large apartments, which the owners bought as insiders at [comparatively] low prices," Kornfeld says. They have been reselling them at a huge profit. And the co-op has reaped the benefit.

"We've done our roof that way; we've done our repointing that way," she notes. "At one point, when the market was very strong, we were making a fortune every year."

That Was Then, This Is Now

At the time, it made sense for this co-op, Kornfeld says, since the building has a 20-year self-amortizing mortgage and can't keep going back to the bank to refinance. When the market was grand, funding with flips didn't seem like a bad thing. After all, the flip tax was a goose that kept laying golden eggs, a seemingly never-ending source of income that could then be applied to improve the property, and thus increase sales.

But managers have long told co-ops generally that the flip tax is gravy, and to depend on it in your annual budget planning is like planning to fund your operations with money you hope to win at the track.

"A lot of boards use it to fill holes in the budget," says Kornfeld. "I advise against that. They think the income will be regular. But you can't count on it."

A lot of boards think flip-tax

income will be regular.

But you can't count on it.

Are boards listening? Some managers say that any improvement in the sales market, bringing with it new flip tax revenues, will be the test. And that test may be here now. Some market insiders see signs of improvement in the market, as a handful of attorneys, brokers, and managers report that, in Manhattan, at least, they have seen an uptick in sales.

"Since the beginning of 2009, there has been a marked improvement in the residential brokerage market," says Manhattan-based manager Don Levy, a senior vice president at Brown Harris Stevens. "There had been a tremendous drop-off in sales activity in the previous year."

Adds attorney Bruce Cholst, a partner at Rosen, Livingston & Cholst , "My firm serves as transfer agent for roughly 40 co-ops, and we've seen a huge bump in sales in June and July." In his own co-op, Cholst reports seven sales since Memorial Day.

Temptation Returning?

"There's a lot of offer activity out there, where it was just dead before," observes Miriam Sirota, a broker with Brown Harris Stevens. "The rates have dropped significantly. I think people had to become comfortable with the new economy, and many had been looking for a long time and now have an idea of what they'd like to buy."

In Brooklyn and Queens, however, two veteran management executives — Marc Kurs, president of TKR Property Services in Brooklyn, and Steve Greenbaum, director of management at Mark Greenberg Real Estate, in Queens — report that sales in those boroughs are flat. Lynn Whiting, director of management at The Argo Corporation, asserts that both Manhattan and Queens sales have not risen consistently enough to label increased sales a trend.

Throughout all this uncertainty, will the board members stay "on the wagon" and no longer count on flip tax revenue as a steady income source? "If they had counted on flips, when the market goes dead, they'll find that they've painted themselves into a bad financial corner," says Gerard J. Picaso, president of the management firm Gerard J. Picaso Inc. "Will boards learn their lesson from this experience? Some listen to the warnings, some don't. It's like anything else. It depends on the boards."

Place your bets, please. Or, rather, maybe you shouldn't.

Adapted from Habitat October 2009. For the complete article and more,  join our Archive >>

Illustration by Marcellus Hall