Co-op Board's Sharp Flip Tax Increase Raises Legal Questions

Some call it a transfer fee. Others call it a flip tax. Regardless of the label, it's a percentage of an apartment's sale price that goes into a co-op's coffers. It's a tool that's beloved by many co-op boards struggling to balance their budgets, but often loathed by apartment sellers.

When the board at a 10-unit Harlem co-op announced its intention to raise the flip tax from from 2% to 7% — and then ordered an apartment seller to put an additional 5% flip tax in escrow pending the final vote on the expanded flip tax — an angry shareholder had a reasonable question: Is this legal?

You must consult the co-op’s governing documents to find out how a flip tax, or transfer fee, can be increased in your building, replies the Ask Real Estate column in The New York Times. These fees typically fund capital expenses in the building.

It is unlikely that the governing documents allow the co-op board to raise the flip tax unilaterally. Every building is different, but an amendment to the proprietary lease or bylaws often requires a supermajority vote of the shareholders (usually two-thirds or three-fourths).

Transfer fees are typically between 1% and 3%, but they can trend higher in buildings that are part of government programs, such as Housing Development Fund Corp. co-ops, says Peter Massa, a partner at the law firm Fox Rothschild.

An increase from 2% to 7% is unusually large, and should trigger questions from shareholders. Such as: Why such a steep increase? And is the board planning to use it to cover one-time expenses, or recurring costs? In other words, is this 7% figure permanent, or will it come down after pressing expenses have been covered?

In New York City, there is nothing requiring a board to take action on a potential sale within a certain time frame, but every board has a fiduciary duty to its corporation. Delaying potential sales could hurt the marketability of all units and potentially deflate their value.

The board cannot condition a sale based on a potential change to the co-op’s bylaws, says Andrew Freedland, a partner at the law firm Herrick Feinstein. “If the flip tax is not in place when you sell," he says, "you cannot charge it. I cannot charge you today what it will cost tomorrow."

Assuming the governing documents prohibit the board’s actions, the seller’s lawyer should write a demand letter to the board stating that it does not have the authority to raise the flip tax on its own, and that the seller will hold the board liable for any damages stemming from its actions.

That's likely to give a co-op board pause before it unilaterally triples the flip tax.