Co-op Board Overcomes Shareholder Apathy and Sells a Flip Tax

A flip tax, also known as a transfer fee, has become a reliable source of revenue as co-op and condo boards struggle to keep their reserve fund healthy in the face of inflation and proliferating local laws. It’s a fee, paid by the buyer or the seller, every time an apartment is sold. Since it usually requires the approval of a significant percentage of the shareholders in a co-op, it can be a tough sell. For boards facing this challenge, it’s good to know that perseverance can carry the day.

At Paul Rosenthal’s 40-unit Upper West Side co-op, there has always been a decent reserve fund — even without a flip tax. Over the last half dozen years, the reserve fund grew because the co-op sold roof space to penthouse owners. More recently, though, the board became concerned about some repair and renovation projects that could drain its financial resources, and so the board decided it was time to look into adopting a transfer fee.

“We were looking for ways to avoid a maintenance increase or assessment if something came up,” says Rosenthal, who is board president. “We’re a century-old building, and we wanted to make certain we had a good cushion.” In particular, he says, there was concern about the requirements for gas-line testing under stringent new Local Law 152 — and the cash that would be needed if the lines failed inspections and a gas shutdown ensued.

Apathy killed the board’s first attempt to pass a flip tax. “It didn’t fail because people were against it,” Rosenthal explains. “It failed because there was a large group that didn’t vote at all, and we needed two-thirds of all outstanding shares.”

(Like what you're reading? To get Habitat newsletters sent to your inbox for free, click here.)

The board kept extending the deadline to try to get the necessary votes, but there was a lack of a sense of urgency. “Every time I’d send out a reminder, a few more people would cast their ballots,” Rosenthal says, “but eventually we said we can’t go on forever extending the deadline. So we just have to call (for a vote) and see where we stand.”

The required two-thirds majority failed to materialize. Not to be deterred, the board marshaled resources and prepared for a second attempt. This time, the board prepared a visual presentation consisting of a five-page PDF, which was shared on screen during a virtual meeting. 

“It wasn’t until halfway through the presentation that we actually introduced the transfer fee,” Rosenthal says. “The first part was on the value of the reserve fund, what role it plays, and how it’s something that potential buyers look for because it adds value to the building.”

The presentation also highlighted that a transfer fee would, over time, replenish the reserve fund as money was spent on various projects. To sweeten the deal, the board committed to a delay in implementing the transfer fee, and it exempted any apartments currently on the market. It also said that payment of the fee would become the buyer’s responsibility, not the seller’s. “In many ways,” Rosenthal says, “this was a strong psychological benefit.” Additionally, the board sent out ballots with a deadline in advance of the annual meeting, and it provided a variety of ways shareholders could return them.

It was the equivalent of a full-court press in basketball, and it did the trick. The board had finally overcome shareholder apathy. The flip tax passed.