Abatements and Equality

With apologies to Lewis Carroll: the time has come, the walrus said, to speak of many things, of taxes, equality, and the concerns they both should bring. More specifically, the time has come to speak of how your co-op or condo is taxed and what the future holds.

To their credit, after being made aware that cooperative and condominium owners paid higher property taxes than single-family homeowners, the city council and the city government actually did something about it. They set "equalization" as a goal and, in 1997, the council adopted a two-year tax abatement program. The abatement, a significant reduction in the calculated tax levy for cooperative and condominium properties, was a way to provide immediate relief to co-op and condo owners. It was also a way to give the city council time to develop a permanent change in the tax structure that would bring about parity for all taxpayers in owner-occupied housing.

Through the boom years of the late 1990s, it looked as though the city was marching toward its goal. Even though the city council could not fashion and pass a permanent change in the tax structure that would achieve the goal of parity, it has chosen instead to renew the abatement programs as they expired.

We are now in the third abatement period, which ends in June 2004. For the 2001-2002 tax year, 275,000 co-op and condo units qualified. The cost to the city in foregone revenue was $180 million. That number, however, is only about half of the overcharge to co-op and condo owners.

When permanent change will come about, if at all, is both anyone's guess. Politically, the beauty of an abatement is that it gets the job done in the short term. In addition, with its limited life span, it can be allowed to expire and thereby provide a back door revenue increase without an overt act by the council.

From a co-op or condo owner's perspective, the abatement is both a blessing and a time bomb. The city's dramatically changed economic environment only increases the uncertainty. Ending the abatements has been put on the table as a way to increase revenue. Co-op board members and condo owners, for whom the prospect of a return to unabated property tax levels is a chilling thought, may want to think about how to lend their voice and their support to the effort to lock in the same tax deal that the single-family owners have been enjoying for many years.

How did we get here? New York City's current property tax system was adopted in 1981. All taxable property is included in one of four classes. Class 1 is for one-, two-, and three-family homes and small co-op and condo buildings. Class 2 comprises rental apartment buildings and most co-ops and condos. Class 3 is property owned by utility companies. Class 4 covers all other properties, including offices, stores, warehouses, and hotels.

Calculating the tax bill for a property is a multistage process. The first step is to determine market value. The next step is to apply the assessment ratio for the class in which the property belongs to arrive at the property's assessed value. The final step is to calculate the billable tax by applying the tax rate for that class.

For example, a single-family house with a market value of $300,000 would be assessed at the Class 1 rate of 8 percent. Its assessed value would therefore be $24,000. Applying the 2002 Class 1 rate of 11.609 percent to that assessed value would generate a billable tax of $2,786.16.

The disparity between the tax burden of single-family homeowners and co-op and condo owners comes about primarily because of the difference in assessment rates between Class 1 and the other three classes. For Class 1, it is 8 percent; for the others, it is 45 percent. (The chart above illustrates the differences).

While Class 1 properties account for 46 percent of the total market value of New York City real estate, their billable assessed value is only 11 percent of the total. Even with the slightly higher tax rates that have been applied to Class 1 properties in recent years, the percent of the total calculated levy for Class 1 is only 13 percent. For Class 2 properties, which include most co-ops and condos, the pattern is reversed. While this class accounts for only 22 percent of the market value, it is 34 percent of the billable assessed value and its share of the total calculated levy is 35 percent.

Class 1 also benefits from a policy that limits owners from runaway tax hikes driven by rapid increases in their property values. The assessed value of a Class 1 property cannot increase by more than 6 percent in any one year and by no more than 20 percent over five years. Consider a house that was valued at $500,000 in 1997 and had an assessed value of $40,000. Assuming that its value had doubled by 2002, its assessed value would only have increased to $48,000. Thus, the gap between the target and actual assessment percents.

There are other differences between Class 1 and Class 2. The market valuation in Class 1 is based on recent comparable sales of similar properties. Class 2 valuation is based on a capitalized net rental income. For co-ops and condos, this is imputed to the building based on the income streams of similar rental properties nearby.

Ironically, because of rent control and rent stabilization, this valuation method, mandated by state law, tends to undervalue some properties. The most expensive co-ops and condos in the city are located in the areas of Manhattan east and west of Central Park. Yet these buildings are compared to rental properties with artificially low rents. Thus, the abatement, which is currently a reduction in the tax bill of 19 percent for most co-ops, is criticized for delivering tax savings to the high income-earning co-op and condo owners who already benefit from a low valuation and need tax relief far less than their counterparts in Brooklyn and Queens.

Also, one of the obstacles to property tax reform that would eliminate the differences between Class 1 and Class 2 co-ops and condos is the question of how to implement it fairly. The goal of the change would be to deliver benefits to owner-occupied units. Yet a blanket implementation without the considerable effort needed to eliminate sponsor-owned co-op units and condos leased to tenants would, in part, defeat the intent of the change.

Certainly the city council and the mayor will continue to have their hands full in trying to maintain fiscal control over the coming years. Nobody envies their task. So far, real progress toward permanent change in tax laws to eliminate the disparity in tax burden between single-family homeowners and co-ops and condos has been illusory, and a weakening city economy could even eliminate the abatement program. Perhaps the only good news is that there are 556,354 co-op and condo units in the city. That many votes can't be ignored.