As buildings age, they inevitably need repairs and capital improvements - a boiler needs replacing, the faÃ§ade needs repair, or the outdated lobby can use a facelift - to name a few. For cooperative buildings with healthy reserve funds, the cost of these expenses may be covered without additional contributions from shareholders. But, when there isn't enough money in the reserve fund, shareholders may be hit with a hefty assessment to cover the cost.
In an effort to avoid the dreaded "A" word, one of the challenges for a co-op's board of directors is to try to find alternative ways to keep the reserve fund strong. One way that is increasingly popular is to require a "flip tax" - or "transfer fee" - each time an apartment is sold.
The idea of a flip tax is not new. In the early 1980's, when a lot of rental buildings were converting to co-op status, buildings needed capital improvements and there was not much money in reserve. According to Stuart Saft, a real estate attorney in Manhattan, "The feeling was tenants who bought at low insider prices and who were making quick profits by selling their apartments at market rates should give something back to the building."
Thus, the flip tax was born.
"It was basically only done in conversions," says Saft. "Then about eight or nine years ago, existing co-ops started implementing flip taxes as they were looking for new sources of income for the reserve fund."