Uh Oh. If Your Flip Tax Is Over Five Percent, Lenders May Not Lend

That was strange because the policy wasn't new — it was instituted in 1984, when the cooperative first began to allow open-market resales.

Brigham Park's flip tax is an important source of revenue, and its calculation is unique to the property. It takes the total dollar value of all the apartments sold in one year and divides that by the number of shares they represent. Ten percent of that number is the dollar-value of the flip tax. Currently, it amounts to $110 per share, and this fee contributes between $100,000 and $200,000 per year to Brigham Park's reserves.

Fannie'ing the Flames

The problem was the Federal National Mortgage Association (commonly called Fannie Mae). About 18 months ago, the lending agency instituted a new guideline that changes the terms under which it buys apartment loans in buildings with flip taxes. Lenders who resell their loans to Fannie Mae (which then assumes the risk associated with the loan) followed suit.

"The Fannie Mae rules say that if flip taxes are higher than five percent of the lower of the selling price or appraised value, the loan is a no-go," explains Jerry Niemeier, vice president of risk management at Nationstar Mortgage.

Fannie Mae rules say

if flip taxes are higher

than five percent

the loan is a no-go.

Why the change? If a loan goes into default and the bank has to take over and ultimately resell the unit, Fannie Mae doesn't want to get stuck with the cost of a hefty flip tax, Niemeier says. Co-ops are unusual in lending in that they are always in first-lien position, ahead of the lender. So as it is, Niemeier adds, if the defaulting borrower does not pay his maintenance, the lender will pay the monthly maintenance charges to the co-op so that the loan does not default.

Some portfolio lenders, which hold onto their loans rather than resell them, do provide financing for buildings with higher flip taxes, though the terms differ from lender to lender. The National Cooperative Bank, for example, can often offer financing through its adjustable-rate loan products, which it keeps in portfolio, to buildings that are stable financially, according to Janet Cupp, an assistant vice president for loan origination.

When Three Into Five Won't Go

Before the rule change, Fannie's flip tax limit was three percent of appraised value, which may sound even more restrictive. But that rule actually gave lenders more latitude. In buildings where the flip tax exceeded three percent, Fannie Mae would still back the loan if the lender adjusted the mortgage amount to reflect the flip liability, Niemeier says.

Under the new rule, lenders aren't even allowed to offer a lower loan amount.

In conversations with loan representatives at Citibank and Wells Fargo about how to resolve the problem, attorney Andrew Brucker, a partner at Schechter & Brucker, says he has been told that co-ops with higher flip taxes basically have two options if they want to qualify for financing: They can officially reduce their flip tax to five percent or less. Or they can formally exempt lenders from having to pay the flip tax in the event of foreclosure or deed in lieu. 

That's what Brigham Park did. About a month ago, the board amended the resale policy to exempt lenders from the flip tax in situations where they foreclose and have to sell an apartment.

"For me," Kobak says, "it was a no-brainer. The reason we were so quick and ready to change our policy to exempt the banks is because we have practically no foreclosures. There's no point in stubbornly fighting it as a matter of principle while we're holding shareholders up from selling apartments." Kobak, who has been associated with the building for 48 years, can recall only six foreclosures in that time.

"We can bang our heads against the wall and fight this as much as we want, but that's not helping those individual shareholders who are trying to sell their apartments," he says. "We can't disregard that."

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Photo: Brigham Park IV official site