There are several different types of flip taxes, each with its own merits and problems. The choice you make should be the one best adapted to the needs of your building and its shareholders.
Per Share Amount. This is, of course, the most conventional and simplest type of flip tax, and one found acceptable by the Court in the FeBland case. It treats all shareholders equally by imposing a flip tax of a fixed dollar amount per share. However, this method can excessively benefit sellers who bought years ago and paid far less than the current market rate, because they would be taxed the same amount as those who bought more recently at higher prices.
Flat Fee. A second method is to charge a certain flat dollar amount per transaction (e.g., $5,000 per transfer). This method benefits the owners of larger units who pay the same amount as the seller of a studio. It can, however, be the best compromise for a building where all the apartments are relatively similar in size. This form of flip tax, if properly enacted, is also perfectly legal under the amended Section 501(c) of the Business Corporation Law.
Percentage of Sales Price. Another acceptable form of flip tax is a percentage of the gross sale price.
Percentage of Net Profit. Perhaps the most controversial form of flip tax is one based on net profit. In this case, the cooperative must very carefully define exactly what its formula will be for determining the net profit; and the formula must be strictly and consistently applied. If your formula allows the seller to subtract from the sales price provision for improvements made to the apartment, there will be an incentive to pad costs in order to lower the net profit figure that will form the basis for the flip tax. Evidence of payment of invoices for improvements should be required
I just answered your other question, so I believe you are perhaps still referring to Co-op Village. If so, yes the buildings in Co-op Village do have a 5% flip tax, and yes, that is high for a co-op. There is a reason for this. These were not co-ops in the sense we think of a co-op until recently. This was historically a special kind of subsidized ownership, and owners could not sell for market prices when they left. It is only relatively recently that they are able to do so, and the the co-operative needed a serious boost in their reserves.
The seller pays the flip tax, so though you are seeing it in whatever listings you are looking at, it is not one of your costs as the buyer. However, when you sell you will need to give 5% of the sale price back to the co-operative.
Hope this helps.
Halstead Property, LLC
Flip taxes range from 1% to 5%, in my experience, but some buildings will temporarily impose a higher percentage. The money is usually added to the building's reserve fund, which is used for emergency repairs and capital improvements.
The amount of the flip tax isn't negotiable, but who pays it is. In resales typically the seller pays. In new developments, often the buyer is forced to pay it. Sometimes a 50%/50% split can be negotiated between buyer and seller.
5% is sometimes found at new developments. If this is a resale apartment, yes, 5% is high. 1% to 3% is more typical for resales.
Karla Harby, VP, Lic. Real Estate Salesperson
Charles Rutenberg Realty