Tax Abatements: Upside-Down Again

Three years ago, the New York state legislature shook up the world of co-ops and condos by changing the way tax abatements get parceled out. Starting in the 2012-2013 tax year, only primary residents of co-op and condo apartments were eligible. The change complicated bookkeeping for co-ops in a number of ways, and it was only in the last few months that things had settled down enough so that one managing agent could say, “The situation has more or less returned to normal.”

Guess again.

Just when you thought it was safe to re-enter the world of tax abatements, the city’s Department of Finance (DOF) is reportedly about to turn everything upside down. Condo owners especially may have to forget what they thought they knew. If the proposed changes take effect, condominium owners may find it is a different – and more complicated – ball game. And for co-op boards and shareholders, it could mean the loss of a change instituted only this year.

How It Was

In the past, many co-op boards levied an assessment equal to the city’s abatement as a way to generate needed operating funds, or bolster reserves. So, if a shareholder got an abatement for, say, $1,000, the co-op levied a $1,000 assessment, and it all equaled out. In previous years, $100,000 in tax abatements to shareholders translated into $100,000 in income for the co-op.

What seemed simplicity itself was complicated three years ago when New York State changed the law that dictates who is eligible for the Cooperative and Condominium Tax Abatement Program. Beginning in the 2012-2013 tax year, shareholders became ineligible for the abatement if the co-op was not their primary residence. In co-ops, the abatement question suddenly required a great deal more effort by managers.

“It sounds simple in theory but it’s a jumbled mess in practice,” explains Alex Kuffel, president of Pride Property Management. “When the change was made to exclude non-primary residents, it became infinitely more complicated.” What if a shareholder used his apartment as a pied-a-terre, or sublet it for a year? And what happened if a non-resident shareholder who no longer received the abatement sold it? The new owner would now be a primary resident and would have to apply again for the abatement.

What all this meant was that the city’s co-op abatement spreadsheet became riddled with errors, and management had to update the city about who was living where. Some months later, the city would then issue a revised spreadsheet, and that would often still include errors and have to be revised yet again. In fact, about 10 percent of the properties listed on the city’s spreadsheet are in error, listing primary residents as non-primary and vice versa, according to George Hatch, director of finance at Pride.

Correcting errors is equally involved. For instance, Pride received the city’s spreadsheets with data for the 2014-2015 tax abatement in December of 2014. In determining who is eligible, the co-op is supposed to base it upon who is a primary resident as of January 5, 2014, and they have until February 15, 2015, to correct errors.

It can get confusing. If you purchased your apartment between January 6 of one year and January 5 of the following year from a primary resident, you’re getting the abatement that was intended for the previous owner. If that previous owner was a non-resident, however, you are not eligible for an abatement even though you are a primary resident. You must let the DOF know that the situation has changed. The abatement always lags one tax year behind the reality.

Further complicating matters: most managing agents receive forms and queries from the city on paper, not electronically, which means that they have to enter data themselves into a spreadsheet or keep track the old-fashioned way. Doreen Berksteiner, DOF’s deputy director of operations, says that if managing agents request it specifically, they can often receive information on primary residences electronically. But she doesn’t encourage it, saying: “This is a laborious task on our end so we try to keep the numbers at a reasonable level. For people who have a large amount of properties, we do hear their cry and try to work with them.”

A Strange New World

It had been a rough road, but the ride was getting less bumpy as managers and boards of co-ops adjusted to the new reality. And condos? They’ve had a comparatively easier time. Condominium unit-owners have historically always applied for and received the tax abatement individually because they pay their taxes personally. As a result, the abatement comes directly to them, not through the association, and condo boards do not levy those equalizing assessments.

In fact, someone in government apparently looked at the much simpler approach taken by condos – no assessment, no fuss – and tried to apply it to co-ops. In a new procedure that began in 2015-2016, the tax abatement can currently be applied for directly by the co-op shareholder, just as a condo unit-owner does. In the form, available at www1.nyc.gov/assets/finance/downloads/pdf/pament_operations/exemptions_appl.pdf, shareholders have to verify that the unit is used as a primary residence.

But in a variation of the saying, “No good deed goes unpunished,” the city may not let that change stand. The DOF’s Berksteiner says that as of the 2017-2018 tax year, co-op and condo owners will no longer be able to use the “direct application” form for the abatement. In an even bigger switch, condo residents will now have to file for and receive their abatement through their condo association or managing agent.

In an e-mail, DOF spokeswoman Sonia Alleyne says: “We are in the process of developing a Condominium Tax Benefit Change, which will be used by condo managing agents to apply for the abatement for condo owners...as is done for co-op shareholders.”

Preventing condo owners from filing for their abatement individually would radically change the process for condo owners and make them use the system that co-ops have been forced to use – one that most managers agree is time-consuming, onerous, and rife with inaccuracies.

“I’m not sure how it would even work, since the individual unit-owners in a condo each receive their own real estate tax bill,” says Hatch, of Pride Management, who says he has received no official word of the change from the city. “The tax bills don’t come to us. So how would management know who’s receiving an abatement?”

The DOF offers no explanation concerning how or why this change is coming about. The agency also would not explain why the decision was made to abandon the recently instituted policy that allowed co-op shareholders to file and receive an abatement directly using the tax benefits application form.

(The DOF is coping with what must be more pressing troubles. At the end of January, an audit by Comptroller Scott Stringer found that the agency had mistakenly granted more than $10 million in abatements to ineligible properties.)

In light of all these headaches, some co-op boards may want to reconsider long-standing policy and abandon the abatement-inspired assessment. Many boards – where large percentages of residents are non-primary – are doing just that, according to attorney Eva Talel, head of the Cooperative and Condominium Board Representation Group at Stroock & Stroock & Lavan.

“In those cases,” she says, “they are going back to the more traditional way of deciding ‘Does the building need the money now? Is this something that needs to be done?’ They may wind up doing an assessment in the same year or even [for] a similar amount, but it’s no longer a lock-step painless way of raising money. It becomes a question of ‘Did you count on this to increase your reserves?’ In that case, you might start to phase it out. If you were counting on it because the boiler had to be replaced right now, you’re going to levy the assessment and let the chips fall where they may.”

Hatch, too, has advised many clients to consider phasing out the assessment or lowering it. But most boards have a hard time envisioning a world without that extra cash.

“Many co-ops have grown dependent on it as a vital part of their annual operating budget,” Kuffel says. “To reduce or eliminate it [would mean that] the income must be made up elsewhere, which typically means a maintenance increase. Faced with that choice, most of our boards reluctantly decide to continue the assessment.”