Q&A: Do we have to pay a flip tax?

Q I am the owner of an apartment in a co-op where I own about 9% of the outstanding shares. We are in the process of selling our apartment and were told that there would be about a 1% flip tax payable to the co-op after the sale. This flip tax was an amendment to the offering plan, which was ratified about three months after we moved in. The flip tax was not mentioned to us when we were buying nor were we invited to a shareholder meeting to approve such an amendment. The original offering plan required a 2/3 vote to approve such amendments. Even though we are only 9% owners, shouldn’t we have had the opportunity to vote and state our case? Would we have much ground to stand on if we stated that we should not have to pay this flip tax?

—Upset on the Upper East Side

A “A “flip tax” or transfer fee is a common way for cooperative corporations to build a reserve fund to finance future capital improvements,” according to attorney Mindy H. Stern, a partner with the Manhattan-based law firm of Schoeman Updike Kaufman & Stern, LLP.

“Sometimes the tax is reflected in the original governing documents (the bylaws and proprietary lease) when the co-op is created by the sponsor, and reflected in the sponsor’s offering plan. More often, they are adopted after the plan is created. In that case, both the bylaws and the proprietary lease must be amended to reflect the corporation’s right to impose it. Such amendments must be approved by a vote of the requisite number of shares described in each of those documents (often two thirds, sometimes three quarters of all shares entitled to vote), either by a vote at a properly called meeting at which a quorum is present after prior timely written notice to all shareholders, or by the shareholders’ unanimous written consent.

“Many cooperative corporation bylaws also require bylaw amendments to be approved by the Board of Directors, again, either by a vote at a properly called meeting at which a quorum is present after prior timely written notice to all directors, or by the directors’ unanimous written consent. It is unclear from the inquirer’s description whether all of the corporate formalities were complied with in this case. I suggest that he or she consult with an attorney to review the documentation provided by the cooperative as well as the relevant governing documents to determine if this flip tax was properly enacted, and if not, to help the inquirer figure out the best course of action under the circumstances.”

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