Time for Taxes

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In 2011, the New York City Department of Finance (DOF) admitted that it had improperly used commercial-property rent numbers – rather than the figures for residential rents – to set tax valuations for co-ops and condos in northeastern Queens. Although citywide valuation taxes for most Class 2 properties – a classification that includes co-ops and condos – increased 7.98 percent, in northeastern Queens it was a different story: they went up by 146 percent. Was this a simple error or something more? Was Queens the only affected borough, or did the problem extend into the others?

To find answers to these questions, Habitat’s Carol Ott and Tom Soter talked with a prominent property tax professional, who made a targeted examination of “comparables” – i.e., the supposedly similar buildings that are used as a basis for the city’s assessments. (New York State’s Real Property Tax Law, Section 581, currently requires cooperatives or condominiums to be valued for tax purposes as if they were rentals. This means their values are derived from comparison with similar rental buildings.) What he found was not conclusive but certainly slightly damning: properties that have no commercial space are routinely paired with properties with commercial rentals. Whether this is done through incompetence, calculation, or a little bit of both is unclear, but the bottom line is that through its recent actions, the city has badly shaken the confidence of its residents. An edited version of Habitat’s talk with our analyst follows. The tax professional requested anonymity.

How pervasive is the problem of comparables not being accurate?

It’s there. The problem is there. [The DOF] has to have the confidence of the taxpayer, [who needs to believe] that the [department’s] actions are correct.

Is what happened in Queens the first time this happened? No. But [it’s never happened] to the extent that we saw in Queens.

Is there any reason for that?

There is a real lack of quality control in the [tax] assessor’s office. At the beginning of Bloomberg’s administration, there were allegations that assessors were taking money and allegedly keeping the assessments of those buildings low. [Veteran] assessors were pretty much cleaned out of the department, and they really didn’t bring a lot of new people in [to replace them]. They started relying a little bit more heavily on the computer. They also lost a lot of people to attrition, and they made a lot of deals for early retirement. The problem is that some of those who left were real good. There was a little bit more human oversight of the data than they have now. You can’t just take what a computer spits out and apply it. You look back. What did you do last year? Buildings’ [assessments] shouldn’t be swinging dramatically upwards and downwards. You need to check by looking back and comparing this year with last.

The city is not doing that?

Not up until this point. [If they had been,] then we wouldn’t have had what happened in Queens.

Do you feel less confident or comfortable with the city’s assessments than you did a decade ago?

A decade ago you rarely saw the swings in assessments that are occurring now. There has been clearly an attitudinal change, which is: “We’re doing things the way we want to do them. We don’t care how they have been done in the past.” Queens is a good example. [Finance Commissioner David] Frankel went out to all these meetings [of co-op tax protesters] and said, “You guys are all wrong! We did it right. There’s nothing to talk about.” And then the commercial comps came up. He went, “Whoops! I guess you’re right!”

This sort of problem does or does not pertain to single-family houses?

It does not pertain because they have a cap [on increases] and their assessments are not derived from the capitalization of income. But the problem with these caps is that you create a situation of haves and have-nots. It’s no longer an ad valorem tax. It’s a political decision, and a lot of these caps and evaluations have virtually no relationship to what the real market values are. This goes on all over the city.

If you were to break out co-ops and treat them more like single-family homes or give them some kind of cap, would that be fair, and would it be more expensive?

You would probably find that the co-ops in the [other boroughs besides Manhattan] would benefit. The co-ops in [Manhattan] would see tremendous increases in their taxes. And, frankly, I am not in favor of this. Co-ops are something more than [apartments]. You’re buying amenities as well, you have doormen, concierges. You’re paying for the amenities that are in those apartments. [Co-ops are not the same as rentals in that regard]. [When coming up with the assessed value, I think the city government] pretty much has a number in mind that they [match up to buildings they call comparables] and then present that to the city council. What they’re actually supposed to do is create a pie and then have slices depending on what tax class you’re in. Those classes should basically bear their proportionate burden to the whole. And from that you can make up a tax rate.

But the pie is not evenly cut up?

Well, the pie isn’t going to be evenly cut up because Class 1 has a huge part of the pie. What happens is the city council gets involved and says, “We don’t care that the state law says the cap is at five percent. We think that’s too much for the homeowner slice of the pie to go up. We’re going to reduce the legal cap on the amount of Class 1 that we’re going to increase and we’ll set that rate. Then we’ll divvy up what Class 1 isn’t paying among the other three. So, you end up having assessments that bear no relation to the value. You have some political manipulation of the rates.

You brought an example of comparables. Please explain.

This is 1 West 64th [see chart above]. This building has no commercial space [but is compared] with these other two buildings [that have commercial space] as comps. The component of retail space is significant, and they come up with an overall income per square foot of $35.28. But if you break the residential component down, it should be only $31.19. That’s the income that DOF is estimating as rental income for the 2011-12 assessment for this co-op. If it were a rental, that’s the income they would get. But [1 West 64th Street] has no commercial space and the others do. Yet these buildings are all being used as comps to come up with [a] $32 [assessment].

So, a board could go to the finance department website, find their building, and see what the comparables are. They can see if the comparables have commercial space or not. As a board director, I would be heartened because at least I would have a sense that I have a fighting chance to successfully protest my building’s taxes.

But, still, you can look at certain areas of the city and see that the assessments haven’t really made a significant change for over 10 years. Now, values really have increased over 10 years; rental values have increased over 10 years. You’d be hard-pressed – except for the last year or two – to see rents coming down. And the real instances where you’d see rents coming down anywhere in the city would be where there’s market rent. That’s part of the problem, too, and that also goes to the confidence levels. Because – I get this all the time – [a client says,] “The guy next door to me is assessed at half of what I am; why can’t I be like him?” And the answer is, “I can’t compare you to them.” Each case, we basically create a value for that particular building based upon the facts that we work with. People personalize assessments way, way too much: “I’ve got a target on me.” And that’s not the case. It’s just the luck of the draw. People have to recognize that with real estate, the city is their partner to some degree. And if you took a building that’s in Manhattan and moved it outside of Manhattan, the rents wouldn’t be as high, the value wouldn’t be as high, and part of the reason rents are high and the values are high is because you’re in New York City. The property is more valuable because of the location. So, in that sense, the city is going to be your partner. The city needs money to operate.

I don’t know if the system is unfair, but it feels unfair.

Yes, it feels unfair. And that, I think, to a large degree is about the confidence you have. There was a tremendous lack of confidence out in Queens and probably justifiably so. Had I been the commissioner, in my initial meetings with the citizens, I wouldn’t have said, “We’re right – don’t bother me.” I would have said, “Let me look into this.”