Q: What is a Restrictive Covenant?
A: Manhattan housing is primarily made up of coop and condominiums. Both coops and condos in Manhattan have restrictive covenants.
The legal definition for a restrictive covenant: "A provision in a deed limiting the use of the property and prohibiting certain uses".
Most all condominiums in Manhattan have the restrictive covenant: First Right of Refusal.
Most coops in Manhattan have the restrictive covenant: Right to Refuse.
Many people confuse the two different covenants. First right of refusal means the condominium has the first right of refusal on an offer but they would have to buy the condominium unit for the same price and terms being offered. They either exercise that right and purchase the unit or they waive the right and issue a waiver so the condominium unit owner can close the sale and transfer title.
A coop right to refuse gives the coop board the right to refuse any coop purchaser for any reason or no reason. A coop is not required to give a reason for a board turn down. Coops must adhere to fair housing and human rights laws. The burden is on the buyer or seller to prove the coop turned down a sale because of discrimination.
A flip tax that many coops and some condominiums impose is also a restrictive covenant requiring the seller to pay a portion of their sale price or profit to the coop or condo board.
Restrictive covenants may prohibit certain financing. FHA does not loan in coops and condominium buildings with restrictive covenants. The Federal Housing Finance Agency is considering a rule that would prohibit Fannie Mae from purchasing loans in buildings where there is a private Transfer Tax /Flip Tax.
Update: 2/2/2011 REBNY (Real Estate Board of New York) saves Flip Tax
I welcome the opportunity to answer any questions about the differences between selling and buying coops and condominiums, flip taxes or general questions about the Manhattan real estate market.