In a proposed Federal Flip Tax regulation, “the (proposed) legislation would in effect prohibit Fannie Mae and Freddie Mac and the federal home loan bank from investing in mortgages where there is a flip tax, be it a condo or coop” according to Eva Talel, a partner at Stroock & Stroock & Lavan in a recently published NY1 report.
A Flip Tax in Manhattan is a fee of 1-3% usually charged by the coop or condo to sellers upon the sale of a unit. The purpose is to raise capital for the reserve fund and capital improvements while limiting maintenance increases or assessments. Flip Taxes became more common during the boom as coop and condo boards looked to counter rising costs with limited revenue sources and in an effort to contain maintenance charges and assessments.
The concern over this legislation is two fold: 1) By not allowing federally funded or insured loans to be issued to buildings with a flip tax, financing opportunities will will be negatively impacted reducing the pool of buyers 2) if the legislation passes as written, buildings would need to do away with the flip or come up with a different method of increasing reserves (usually higher maintenances). Either one could negatively impact equity value. My personal opinion would be the financing issue would have the more significant impact on apartment values.
Eva Talel mentions a quick fix to the legislation – “…(They should) carve out those buildings where Flip Taxes go back into the building”.
If you are a Manhattan condo or coop owner, while the comment time has passed, Ms. Talel still recommends voicing your concern. To do so, send a comment to Alfred M. Pollard, Esq. General Counsel Federal Housing Finance Agency – Email: regcomments@fhfa.gov
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February 4th NOTE: The Real Estate Board of New York (REBNY) along with others petitioned and won a re-write in the rules permitting NYC Flip Taxes to be exempt when said flip taxes benefit the coop or condo itself (vs. a developer).
Quoted from The Real Deal – “Tuesday’s approval of an amendment to a proposed Federal Housing Finance Agency ruling dealing with flip taxes could keep lenders from abandoning the New York City residential market in the future, according to industry experts.
The amendment pared down an earlier FHFA provision, announced in fall 2010, which would have barred government-sponsored Fannie Mae and Freddie Mac from lending in all multi-family buildings in which a flip tax is written into the contract. In its original form, the proposal could have adversely affected roughly 50 percent of the New York City residential stock, according to Real Estate Board of New York President Steven Spinola.
The amendment was passed as part of a larger proposal that is still winding its way through the approval process….And while the FHFA flip tax mandate hasn’t yet gone into effect, Spinola said that the adopted amendment is a coup for the city’s residential industry.
“It’s a very big victory for co-op and condo owners throughout the city,” Spinola said.”