Property Taxes

Nothing is as certain as death and taxes, they say, but in New York City, the only thing certain about property taxes is that the system by which they are determined is flawed. Indeed, the situation has gotten so bad that some New York co-op owners have already decided that taxes are a reason to move.

Demetrius Papageorgiou, a former board member at a Brooklyn Heights co-op, is currently investigating alternatives to co-op living within the city or even in New Jersey. The reason? Papageorgiou recounts how just one annual property tax hike for his 800-square-foot apartment was some 20 percent in 2004. He now pays $4,500 a year in real estate taxes or almost $6 a square foot. According to Papageorgiou, that compares unfavorably with a brownstone in nearby Clinton Hill, which is taxed at about $2,500 a year for 3,000 square feet (83 cents a square foot) of living space with a basement and garden.

“That is seven times cheaper than what a comparable co-op owner would pay,” Papageorgiou says. “I believe the taxes in the city for co-op owners are exorbitant given the minimal returns in services that the community gets back, the most deficient of which is education.”

Some 25 years after legislators attempted to resolve inequities in the New York property tax system, no one seems happy. A study last year by the city’s Independent Budget Office (IBO), released in December, indicated that disparities not only remain but, in some cases, have worsened.

Single-family homeowners generally still receive the most favorable treatment under the existing property-tax structure, but complexity and lack of transparency of the current law, S7000A, is making everyone feel overburdened, says the IBO. Indeed, what was meant to fix a flawed system has even seen co-op buildings in the city’s five different boroughs treated differently.

“By helping some people you hurt other people,” says Paul Korngold, a real estate attorney at Tuchman, Korngold, Weiss, Lippman & Gelles, which represents some 600 co-ops in the city. “The money has to come from somewhere.”

Inequity’s Roots

The root causes of situations like Papageorgiou’s go back a few decades to a 1975 decision by New York State’s highest court that forced Albany legislators to seek more equitable property-tax assessments. Several studies completed after that decision discovered that, among other problems, New York City homeowners in low-income communities often paid a higher effective tax rate (ETR) – the tax paid on every $100 of full-market value – than wealthy homeowners.

Faced with a potential voter backlash, with the well-heeled always better equipped to lobby government than those with less money, legislators took six years to replace the old law with S7000A – which roughly kept the status quo. In the city, four classes of property were created with three types taxed on a different share of market value.

The second class, co-ops and condos, are assessed differently. In a bid to lessen the tax burden for owners of those types of dwellings, they are valued as rental properties (S581 in the Real Property Tax Law), using comparisons to nearby rental buildings rather than sale prices of individual apartments. Yet, since at least 1984, the overall effective tax rate for co-ops and condos remained higher than the rate for one-, two-, and three-bedroom homes (Class 1 properties). In fact, through the early to mid-1990s, Class 2 rates grew faster than those for Class 1 houses, so that, by 1995, the ETR for Class 2 apartments was more than twice that of a house, the IBO says.

Apartment owners then asked why the size of their taxes depended on whether they lived in a house or an apartment building. Rather than addressing the valuation issue, however, a temporary fix was implemented in 1997: a co-op and condo tax abatement. To some co-op and condo owners that was good news, even if it was supposed to be temporary, while legislators made other plans.

More Problems

The reality is that the co-op/condo tax abatement has never gone away, and the disparities caused by the S581 discount persist. Simply abating an equal percentage of unequal tax burdens, according to the IBO, does nothing to fix the differences among apartment owners.

Of the “$293 million spent on the abatement this year, $156 million went to apartment owners whose effective tax rates were already below that of homeowners or who did not need the full abatement to reach the homeowners’ level,” says the 2006 IBO report. Much of that excess spending went to Upper East Side and Upper West Side apartment owners, people whom some say can best pay their taxes, while many co-op owners in Brooklyn and Queens still have higher tax burdens than homeowners. In fact, the Independent Budget Office estimates that in 2007 it would take another $55.4 million in abatements for co-op and condo taxpayers citywide to reach parity with regular homeowners.

There are also inherent complications in valuing co-ops by comparisons to nearby rental properties. For instance, a co-op at 720 Park Avenue saw its tax burden fall by 12 percent to around $1 million in 2006, even as property tax assessments across the city generally rose by 9 percent, according to the Department of Finance (DOF). Yet a search of property records shows that recent individual apartment sales at 720 Park have fetched up to $20 million.

“Often with an old building, we find it being compared with rent-regulated buildings, so [taxes] are a lot lower,” says Owen Stone, a spokesman for the DOF. “We can’t use comparative sales data, so we get a situation where we say the whole building is worth $22 million and it is not reflective of what the apartments are going for.”

That’s great news for owners at 720 Park Avenue, but it seems that it is a very specific anomaly. Throughout the city, there are vast differences in effective tax rates. In general, neighborhoods with a large S581 discount have the lowest ETR, while those with the smallest discount face higher tax burdens. The effective tax rate in Jamaica, Queens, is 1.38, almost four times the ETR of 0.39 in Crown Heights, Brooklyn, the IBO says. The S581 discount in Crown Heights at 83.4 percent is also larger than the 55.2 percent discount on properties in Jamaica. Elsewhere, co-op and condo owners in the fashionable Park Slope-Carroll Gardens area of Brooklyn also see a comparatively low effective tax rate of 0.39. Their S581 discount is 87.5 percent.

Individual boards are seemingly unaware of how much tax rates can vary across the city. For most, the only bottom line is that their property tax bills keep rising even as they use attorneys to argue their tax bill each year. “All of these increases are absurd,” says Georges Mosse, president of a Brooklyn Heights co-op which regularly fights increases. “It looks like we pay more taxes than any other U.S. city.”

Murky Future

The future of New York property taxes is more opaque than the current situation. All anyone can agree on is that the current law is unfair. “You cannot get equitable taxation with S7000A,” says Martin Karp, a member of the board of the Council of New York Cooperatives & Condominiums and chairman of the Action Committee for Reasonable Real Estate Taxes.

The IBO examined several alternatives to the current real property tax structure, though they are careful not to endorse any single method. All the alternatives collect the same amount of property tax for the city.

“We are not suggesting any alternative,” says Doug Turetsky, communications director at the IBO. “There are many more approaches possible, and all we are trying to do is show how difficult it would be to address these problems.” (Martha Stark, the city’s finance commissioner, has long had the stated goal of revamping the tax assessment system for co-ops and condos, according to a media report, although Stark was not available for comment.)

The alternatives suggested by the IBO use either a single tax rate for all properties or various two-rate structures. Market values would be used for valuation, since a new law signed last July made co-op prices public, and abatements would cease. Under a single-rate approach, each property type’s share of the total tax levy would equal their share of total market value. In that scenario, condos and co-ops in large buildings would have tax increases of 94.5 percent ($4,502 per apartment) and 95.7 percent ($2,482 per apartment), respectively.

Under a second alternative, properties would be divided into either a residential or commercial class. In this scenario, condos and co-ops in large buildings would face much smaller percentage increases of 15.8 percent and 16.5 percent, respectively (or $751 and $428 per apartment, respectively).

In a further alternative, property is partitioned into two classes, based on whether it is owned for personal use or investment. Here, co-ops and condos in larger buildings across the city could actually get tax cuts of roughly 17 percent.
Of course, co-op owners should consider that while the existing structure has problems, it could be worse. Valuations using imputed rental income, such as in the case of 720 Park Avenue, are almost always lower when based on nearby rentals than if comparable sale prices are used. In some cases, keeping taxes almost artificially low by not using individual unit sales prices has undoubtedly helped some fixed income residents stay in their co-ops. And the effective tax rates for co-ops and condos have both declined by almost 30 percent since 1984 under the existing system, according to the IBO study. The bad news is that single-family homeowners received a better deal with their effective tax rates dropping 65 percent over the same period.

With these disparities and the ongoing desire for a more equitable deal across the city and property types, most pundits agree that system change is inevitable. Given how much the New York property landscape has been tranformed in the last quarter century and how much shifting tax rates will affect their investment, co-op and condo owners should probably get more involved in the discussion.

Large condos, despite the fact there are 109,842 in the city now compared with 17,136 in 1984-85, will contribute just 5 percent of the total property tax levy in 2007. Though that is more than the 0.54 percent they paid over 20 years ago, according to DOF data, it’s still half the contribution of co-ops in the 2007/8 fiscal year. Co-ops are expected to contribute 10.3 percent of the total property tax levy in 2007/8, up from 8 percent in 1984/85, according to the DOF.

The reason is the tax exemptions handed out in recent years to promote condo construction. One new condo project in Brooklyn has real estate taxes per apartment of $36 a month for ten years, rising to $840 a month when the exemption expires, excluding any allowance for market appreciation, says one New York managing agent.

“When people in those buildings see the abatements and exemptions come off it’s going to be a killer,” notes Rosemary Paparo, director of management at Buchbinder & Warren.

Twenty-five years after the birth of the current tax system, one thing is certain: few are satisfied. Although many are working for change, what shape or form it might take is still unclear.