All Owners Aren’t Equal

One more strike against property tax fairness leaves boards scrambling.

If you have lived in a cooperative or condominium during any part of the past 15 years and the proper forms were filled out at some point, chances are you’ve been getting a tax abatement on your apartment. “The Cooperative and Condominium Tax Abatement Program” is responsible for that, giving tax abatements to Residential Class 2 properties (condos or co-ops with more than three units). Any unit in a Class 2 building is eligible, except units receiving any other type of abatement, sponsor units, units that are used for non-residential purposes, and units owned by someone who owns three or more units in the same building.

The abatement was the result of state legislation, first passed into law in 1998 and renewed regularly ever since. It was originally enacted as a temporary measure to compensate for the discrepancy between the taxes on single-family homes and the much higher taxes on co-op and condo apartments in multi-unit buildings. This fall, there was some delay in renewing the law, but the legislators eventually came through, extending it to June 30, 2015.

A good thing, right? Well, yes and no.

The revised law, which will be phased in over this tax year and the next, excludes non-owner-occupied apartments from the abatement program, a category that the city’s Department of Finance says includes all trusts or limited liability companies (LLCs).

Complicating matters: the city has already passed on the abatement to everyone for the 2012–2013 tax year. In the case of co-ops, the city gives the corporation a tax credit for the abatement amount, which is earmarked for a unit (not a person). The corporation then gives the shareholder a credit on his or her maintenance. If the shareholder is deemed ineligible for the abatement – because of the new wrinkles in the law regarding non-owner-occupied apartments – the co-op will have to retrieve the money by taking away the credit.

A major snag comes from the way most co-ops have treated the abatement in the past: they have levied an annual assessment that is just about equal to the abatement as a way to make ends meet. So, shareholder Jane Doe gets an abatement for, say, $1,000 and the co-op levies a $1,000 assessment; the co-op gets $1,000 from Jane Doe, but Jane is no poorer because the abatement pays for the assessment (she’s also no richer, which is another story). The corporation can use that extra money to pay taxes, build up its reserves, whatever.

But now, that delicate balancing act has been upset. If, for this 2012–2013 tax year, the co-op credited Jane Doe and all the other shareholders with, say, a total of $100,000 in abatements and levied them $100,000 in assessments, a problem could come up. With the exclusion of non-owner-occupied apartments, the number of units eligible for abatements may have gone down, so now the corporation assesses everyone a total of $100,000 but only receives $50,000 in abatements. Because all shares must be treated equally, the co-op would still have to charge those newly disqualified residents the $50,000 difference.

For condos, the situation is simpler. Condo owners pay their taxes personally, so the abatement comes directly to them, not through the corporation. Experts say that condos also do not levy the abatement-canceling assessments popular with co-ops.

By 2014–2015, the abatement phase-out for non-owner-occupied apartments will be over. But there is still something else to consider before then: what should co-ops do about that assessment that has traditionally been levied – the one that is equal to the abatement?

Boards will have to decide if they will levy it at all. For the resident-shareholder, it evens out. The non-resident-shareholder, however, would have to pony up more money than his neighbor, because assessments must be levied equally against all shareholders.

“Can they do it?” asks Paul Korngold, a partner at Tuchman Korngold Weiss Liebman & Gelles. “Sure, they can. But there will be a certain percentage of the building that will start screaming.” And if they don’t assess and simply let the abatements go through, they stand to lose a big chunk of change that was counted on every year.

“This is an administrative nightmare,” says Michael Rogoff, vice president of Akam Associates, a management firm.

Non-Primary Blues

Rogoff says he advised all of his clients to wait until June to credit the abatement to the units to see how many are actually deemed to be ineligible. Abraham Horwitz, a CPA with Czarnowski & Beer, says that most of his co-ops are also in a wait-and-see mode. “Generally, that’s done in the spring,” Horwitz says.

It gets even thornier because many experts say they believe the city wrongfully identified many residents as not living in the units or holding them as LLCs/trusts. Out of the 536,746 condo and co-op units in the city, about 366,000 unit-owners are eligible for the tax abatement, reports the city. The rest are excluded for a variety of reasons. Out of that number, the Department of Finance labeled 120,000 as occupied by “non-primary” residents.

But co-op and condo lawyers, managing agents, and accountants say that number is incorrect. Owners and shareholders had until April 12 to contest that finding and prove they deserved the abatement. “We have co-ops where we know that most of the building has primary residents and the city flagged 50 percent as non-primary residents,” says Rogoff. “It’s a mess. It’s really a mess.”

In some cases, shareholders didn’t realize the importance of the city mailing asking them to verify their residence and tossed it as junk mail. In other cases, Rogoff says the shareholders thought the letter was a scam because the return address was from New Jersey.

Attorney Stuart Saft, a partner at Holland & Knight, says the new exclusions concerning trusts and LLCs are “just unfair and mean-spirited. Many people use trusts for estate planning purposes and LLCs for privacy,” says the attorney, who adds that he could imagine all sorts of fallout from the change. People might leave the city to avoid having to list their residence in their true name. Others with an apartment in an LLC might argue that since the city does not consider them to be primary residents, they don’t have to pay city income taxes. “It’s a mess,” Saft says, echoing Rogoff.

Lost Abatements

When asked why the city handed out an abatement prematurely – when legislators in Albany were talking about changes related to non-primary residents – Owen Stone, spokesman for the New York City Department of Finance, says: “It did not make sense to revoke the benefits for all 366,000 unit-owners and bill them the full tax amount when we all knew that the law would be renewed in some fashion for the majority of them.”

The city says that in June it will inform co-ops which residents have been determined to be “non-primary.” Rogoff says he would be “surprised” if this happens on time. As of early May, it was unclear whether there would be a mechanism for people to contest the residency finding.

The way the law works, those who are losing their abatements will get only 50 percent of the abatement for that retroactive 2012-2013 year. They’ll get 25 percent in the 2013-2014 tax year and then nothing come 2014-2015. If a co-op has already credited abatements to all residents and needs to reclaim them, how that is done is going to be different for every co-op, says Stephen Beer, a partner with Czarnowski & Beer.

This year will probably be the most difficult one for buildings to adjust to the new tax abatement, says Korngold. Although the overall tax bill is the same, with less money coming back to the building through abatements, the building could face issues from the mortgage-holder because there is less cash in escrow, says Korngold. “If there is an escrow shortfall, the bank is going to look to the board to make that up. And the board may have to go to those non-primary resident shareholders to get the money.”