A Change in Assessments?

Byzantine is often the word used to describe the way the city’s Department of Finance (DOF) assesses co-op and condo taxes. “One year, the co-op I represent is charged $10 million in taxes, the next year, it is $7 million,” says a tax lawyer who represents co-ops in disputing the assessments that result in the higher or lower taxes. The different figures come about because of challenges by the building owners over the value of their properties – but the fact that such wide variances occur from year to year makes one wonder about the real worth of property in New York City.

Change may be in the wind, however. A new state law that the city reportedly pushed for passage may hint at a significant transformation in the system. While most media outlets and brokers have been focusing on the new law’s requirement that co-op sales prices be part of the public record, there could be a greater significance to the proposal than that: it may be a first step in changing the way the DOF figures out how much you owe in annual taxes.

Calculating the tax bill for a property takes a few steps. The first is to determine market value. The next is to apply a predetermined assessment ratio for the class in which the property belongs (there are four, with co-ops and condos falling into Class 2) 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.

This system, adopted in 1981, has long been criticized by co-op and condo advocates as unfairly favoring one-, two-, and three-family homeowners at the expense of cooperatives and condominiums. The law requires that cooperatives or condominiums be valued as if they were income-producing (i.e., rental) buildings. This means that values for co-ops and individual condo units are not based upon the sale prices but on comparisons to similar rental buildings. One reason the DOF presumably uses rentals for comparisons is that rent rolls are public knowledge, while co-op sales prices (the best indicator of value) are not.

And that’s where the new law (which was signed by the governor in late July) comes in as a possible indication of things to come. The law makes public the sale prices of co-op apartments. While not earth-shattering in and of itself (except for buyers and sellers who want to maintain their privacy and for brokers who trade on their insider knowledge of what people pay), the law is curious because of who is reportedly behind it. The city government, for instance.

Could this be a first move in a plan to revamp the tax assessment system for co-ops and condos, long a stated goal of Martha Stark, the city’s finance commissioner? Could that be a reason – according to Martin Karp, chairman of the Action Committee for Reasonable Real Estate Taxes – that the city commissioned an impact study on what the effect would be if the current tax assessment system were changed to one based on selling price?

DOF spokesman Owen Stone has no comment on the supposed study, nor will his office say much as to its motives in backing the new law except that the government believes in “transparency” in sales transactions. Others are skeptical of such stated motives, however. “They believe in transparency the way the Bush Administration does,” says one tax attorney with a laugh. “For one thing, the current tax system is so transparent you can’t even see it. I think this law could be a foreshadowing of change. Assessments for many co-ops are below what they should be.”

“In order to do a tax plan fairly you need the correct information,” adds Greg Carlson, executive director of the Federation of New York Housing Cooperatives & Condominiums. “Without that information, you’re shooting in the dark. Every other form of real estate [has the prices posted] out there. The only form that doesn’t is the cooperative form. I believe that co-ops are homeowners and I want to be taxed the way owners of single-family homes are.”

So, if the assessment methodology is altered, what will that mean for co-ops and condos? Carlson thinks areas in Brooklyn and Queens are overvalued and would see a change – to lower taxes – if they were evaluated based on sales figures, while taxes on Manhattan’s Upper West Side co-ops, for instance, might go up.

“I’ve told Martin [Karp and other advocates of taxes based on sales], ‘Be careful what you wish for,’” adds the tax attorney. “I can tell you pretty categorically that the real expensive stuff is going to go up considerably [under a revamped system]; today, Riverside Drive apartments are in the $20 to $30 a square foot range, but when you look at the newer condos, those are coming in at $85 to $100 a square foot. That gives you an idea of what the new costs might be.”

“You would assess based on selling price,” agrees Karp. “There would be shifts in how many co-ops got reductions, how many would stay the same, and how many would get a better position.”

Yet those scenarios could be a long time coming: any change must be made at the state level, since state law governs the tax assessment system. Still, a journey of a million miles begins with a single step. And that first step could be happening now.