Coalition Testimony in Opposition to Co-op Recordation Tax

TESTIMONY OF THE DC COOPERATIVE HOUSING COALITION (DC/CHC) ON THE TAXATION OF HOUSING COOPERATIVES IN THE DISTRICT OF COLUMBIA BEFORE THE COMMITTEE ON FINANCE AND REVENUE, COUNCIL OF THE DISTRICT OF COLUMBIA
MARCH 10, 2010

Good Morning. On behalf of the Board of Directors of the DC Cooperative Housing Coalition (DC/CHC) and our member cooperatives across the District, we would like to thank the Committee for the opportunity to testify before you this morning. For over a quarter of a century, the Coalition has provided a voice for the thousands of District residents who live in co-ops and has promoted cooperatives as a desirable housing option. My name is David Horrigan, and I am the current president of the Coalition.

We are today to talk to you about the temporary recordation tax on transfers of memberships in housing cooperative in the District of Columbia and the problems the District could face if the Cooperative Housing Association Economic Interest Recordation Tax Temporary Amendment Act of 2009 (The Temporary Recordation Tax Act) is extended when it expires this year. We would like to thank Chairman Evans and the Committee for your consideration of this issue, as well as Committee Clerk Jeff Coudriet, Legislative Analyst Ruth Werner, and Bob McKeon of the Office of Tax and Revenue (OTR) for their work on the issue and the time they have taken to hear the concerns of the District’s housing co-ops.

In discussing the dangers of extending the recordation tax, we would like to address the unique role housing cooperatives play in the District, how these co-ops are taxed, the market conditions facing the District’s housing cooperatives, and how the Temporary Recordation Tax is affecting adversely the District’s cooperative housing community.

We understand the serious economic situation facing the District Government. However, as you consider whether to extend the Temporary Recordation Tax, we ask you to consider the contribution co-ops make to residential life in the District, the detrimental Effect the Temporary Tax is having on the District and its co-ops, the problems with the implementation of the Temporary Tax, and some unworkable aspects of this temporary measure.

COOPERATIVES ARE NOT CONDOMINIUMS

As you know, a housing cooperative is a form of ownership in which a person purchases shares—or membership—in a cooperative corporation formed to provide its members a place in which to live. The cooperative corporation owns the building, land, apartments, and all common elements. The owner-members, in turn, own the corporation.

Unlike condominiums, which are real property that is transferred in the same manner as a single-family home, co-op shares are personal property, not unlike ownership of stocks in a corporation or partnership. This distinction is important both legally and practically when considering a recordation tax. Treating cooperative housing sales as real property transfers when they are not raises important policy questions.

Recordation taxes are not assessed on most types of asset transfers. We must ask: “Why are co-op transfers being taxed when other personal property transfers are not?”

Co-ops have existed in the District since 1920, and in many cases, they were formed by groups of apartment renters who joined together to form housing corporations and buy their buildings. Co-ops have served an important social function in the District by giving these apartment renters an opportunity to collectively gain an ownership stake in the community.

Faced with a severe financial crisis last year, the Council implemented the Temporary Recordation Tax on cooperatives. Although there was no method for actually recording co-op transfers, and no public record of such transfers, the tax applied retroactively to any sale on or after October 1, 2009. This provision created administrative problems for buyers, sellers, and transfer agents. Transfer agents literally did not know what to do with the tax payments collected on co-op transfers.

In addition, the temporary legislation made cooperative associations themselves liable for the tax on these transactions between buyer and seller. In essence, it turned cooperative associations into tax collectors—something they are neither equipped nor qualified to be. Most co-op associations are run by small, volunteer boards that simply do not have the resources to manage tax collections.

Moreover, this obligation is unfair to cooperatives in comparison to other types of communities in the District. The transfer and recordation taxes on sales of condominium units and single-family homes are payable only by the actual buyers and sellers. The law does not—and should not—impose on condominium and homeowners associations the duty to collect taxes or pay delinquent taxes on private sales of homes within their communities. Cooperatives should not have to face more onerous responsibilities.

The District’s housing cooperatives pay substantial real property taxes. However, last year’s Temporary Recordation Act has imposed unfair burdens and logistical problems. In addition to these specific problems, we would like to conclude our testimony by discussing briefly the overall policy problem with extending the tax.

THE TEMPORARY RECORDATION TAX SHOULD NOT BE EXTENDED

We have discussed the unique nature of cooperative housing and how this progressive form of residential living has given the District’s residents opportunities for collective ownership. We have received reports that the Temporary Tax has had an adverse effect cooperative housing, and extending it past this year could do more damage.

Although cooperative housing has existed in the District since 1920 and is a major form of housing in New York City and other metropolitan areas, it is still a relatively uncommon housing option for many District residents—and their bankers. Fewer lenders finance cooperatives, and popular mortgage programs, such as those of the Federal Housing Authority (FHA) and the Department of Veterans Affairs (VA) do not apply to co-ops. Thus, cooperative purchasers have fewer financing options.

Nevertheless, cooperative housing has historically presented an attractive option because—although co-ops had fewer financing options—co-op transfers had lower closing costs because, legally, they are transfers of shares or memberships, and not transfers of real property. The Temporary Recordation Tax Act has made transfers of cooperative shares and memberships more difficult and expensive, and we are already starting to see some of the effects.

Since the time the Temporary Recordation Tax became effective last October, The Edmund J. Flynn Company, the District’s original and largest cooperative housing transfer agent, has reported a softening of the cooperative housing market. In addition, Realtors have commented that the Temporary Recordation Tax has put a chill on co-op sales. If the negative impact of this tax continues, the District’s housing cooperatives will suffer additional harms, and the District Government will suffer the unintended consequence of a devalued tax base.

As we have noted, we understand the critical budget constraints the District Government faces. However, as you consider your options during this budget process, we urge you to also consider the contribution of housing co-ops and their thousands of resident members to residential life in the District, the success of cooperative housing in transforming former apartment complexes, and the damage extending this temporary tax would do to cooperative housing in the District. We request respectfully that you not renew the Cooperative Housing Association Economic Interest Recordation Tax Temporary Amendment Act of 2009 when it expires this year. On behalf of the DC Cooperative Housing Coalition and co-op residents across the District, we thank you again for your time and consideration.