Q: In our 10-unit South Harlem co-op, the new board announced an initiative to raise the flip tax from 2 percent to 7 percent of the gross sale price, but has not voted on it. Meanwhilewheel of fortune slots, a sale has been pending for months, waiting for board approval. The seller’s lawyer sent a letter addressing the suspicious timing of the flip tax announcement and delays in the sale. After initially rejecting the buyers, the board is now accepting them — contingent on the sellers placing an extra 5 percent flip tax in escrow for a year, which would allow the board to claim the money if they raise the flip tax. Is this legal?
A: 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. These fees are imposed when co-op shareholders sell their shares, and they 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 percent, but can trend higher in buildings that are part of government programs, such as Housing Development Fund Corporation co-ops, said Peter R. Massa, a partner with Fox Rothschild.
An increase from 2 percent to 7 percent is unusually large, and should be questioned by shareholders. Is the board planning to use the increase to cover one-time expenses, or recurring costs?
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 the units and potentially deflate their value.
The board cannot condition a sale based on a potential change to the co-op’s bylaws, said Andrew B. Freedland, a partner in the Real Estate Department at Herrick. “If the flip tax is not in place when you sell, you cannot charge it,” said Mr. Freedland. “I cannot charge you today what it costs 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.
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