Q&A: Increasing the Flip Tax

Q I am an owner of a co-op in Forest Hills, Queens. We currently have a flip tax  of $2.00 per share. The sponsor is pushing to amend this to make it 3% of the  sales price. The sponsor is also the managing agent and they do whatever they  want regardless of what the minority shareholders say. Because of this great  distrust, the amendment has always been voted down. And because of this, the  sponsor has found a way to get around it. At closing, when the new purchaser is  about to sign the deal, the sponsor will insist that they vote yes to the new  flip tax proposal or they will not allow the sale. We were never told about  this until a new purchaser told us at the latest board meeting. The sponsor  told us that it was perfectly legal for them to do this.  

 My question: Is this legal? Can the sponsor also be the managing agent? Also,  the board is made up of six (6) members, three (3) from the sponsor and three  (3) minority shareholders. But because they have so many votes they always seem  to get to pick a minority shareholder, who votes for them making every vote in  their favor. Is this board makeup legal?  

 —Stacking the Deck in Queens  

A "You are really asking several questions in one, as well as several questions  that are not being asked,” says attorney Aaron Shmulewitz of the law firm of Belkin Burden Wenig & Goldman, LLP. “First, the amendability of flip taxes in a mature co-op is normally governed by  the proprietary lease. Changing a flip tax calculation method would require an  amendment to the proprietary lease, which normally requires the affirmative  vote of at least 67% of all shareholders. There is also normally a time limit  for any such amendment campaign, typically not longer than eleven months. So  the ability of the sponsor to get shareholders to agree to amend the flip tax  provision is limited by those parameters. Within those parameters, a sponsor can require shareholders to agree to vote a  certain way; if a shareholder agrees to vote that way, he/she is bound by that  commitment.  

 “It is legal for a sponsor to condition a sale on the purchaser's agreeing to  vote as requested by the sponsor. It is also legal for a co-op's managing agent to be affiliated with the sponsor,  and it is also not uncommon during a limited period after the conversion  closing—typically three years. Beyond such a limited period, such a link is increasingly  uncommon, but is still legal if disclosed in the conversion offering plan. The  shareholders should examine the plan carefully to see what, if anything, was  disclosed on the topic; if inadequate disclosure was made, the shareholders can  file a complaint with the Attorney General's office, which often has the effect  of convincing a sponsor to relinquish management.  

 “Finally, a sponsor's ability to elect members of the board is governed by the  co-op's bylaws, and by disclosure made in the offering plan, which should be  reviewed carefully. If the bylaws do not prohibit it, and if the offering plan adequately disclosed  it, a sponsor might legally be entitled to cast its votes as between two or  more non-sponsor shareholders for a final board seat. However, as above, if the bylaws prohibit the practice, or if inadequate  disclosure was made, the shareholders can file a complaint with the Attorney  General's office, which often has the effect of convincing a sponsor to stop  casting its votes for board seats to which it is not entitled."      

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