save our flip tax! are coop flip taxes in danger from Fannie Mae?

odd ducks make for odd rules
Interesting catch by The Miller on his blog on Thursday, [Fannie Mae] Proposed FNMA Rule Change Could Damage Co-op Prices. I had been vaguely aware from national real estate sources that there has been some controversy brewing about the practice of home builders in some parts of the country adding covenants to deeds requiring that resale buyers pay a kick back to the builder when the house is sold by the original buyer. One real estate ListServ I am on has been buzzing about the practice, and the possibility that federal regulators may seek to limit it, but I had not paid attention to this thread in the (mistaken) belief that it was just another real estate practice out there in America that had nothing to do with Manhattan.

As The Miller points out, that is wrong. As with so many laws and rules that have to do with "real estate", life on our peculiar little island is so different from life as practiced in America that general rules that make sense elsewhere can create real (and unintended) problems in New York County (special rules permitting coop shareholders to take advantage of tax deductions for coop expenses are one example of a work-around). God bless the folks at REBNY (for once!) for being on top of this.

See The Miller’s blog for the whole story, but the Long Story, Short version is that the feds are looking at ways to discourage builders from adding these kickbacks by prohibiting Fannie Mae from buying mortgages on homes with that kind of covenant. Apart from being a shady way for developers to reap revenue from a home long after they have sold it, one problem with these covenants out there in America is that they may not be fully disclosed; another is that they make comp analysis more difficult. It is not heard to see that these are legitimate issues in America.

Nor is it hard to see that these issues have nothing to do with coop flip taxes. A builder who wants an income stream from future sales is (by then) a remote party with no legitimate interest in the future transactions; a coop that uses a flip tax to generate operating revenue or to increase a capital fund when its own shares are transferred is a direct party in interest to the sale. In addition, flip tax information is routinely shared in coop marketing (at least among REBNY firms), so the non-disclosure issue should be a non-issue here.

my REBNY dues [finally?] at work!
So kudos to REBNY for being on top of this issue. This is one area in which the political clout and government affairs efforts of REBNY work in favor of everyday coop owners. Nice catch by The Miller, who includes in his post a link to the 2007 treatise he co-authored (much recommended!) about coop and condo valuations, which found (among a great many other interesting things) that coop flip taxes are associated with (mild) increases in coop share value.

© Sandy Mattingly 2010