My View: The War Against Co-ops and Condos

Cooperatives and condominiums are the most successful forms of housing in New York City. The value of these apartments continues to appreciate decade after decade, and they have enabled many people of moderate means to retire on the profit from their homes. Despite that, the New York City Council, the mayor’s office, and the New York State Legislature have placed targets on the backs of every cooperative shareholder and condominium unit-owner.

Out-of-Whack Taxes

Don’t believe it? Let’s look at tax policy. The tax rate stays more or less the same, but assessments skyrocket each year. This has become the source of the biggest increase in expenses for co-ops and condos.

But that’s not the worst of it. Co-ops and condos are taxed significantly more than one- to three-family homes of comparable value. There are two classes of housing in New York that get taxed: Class 1, consisting of one-, two-, and three-family homes; and Class 2, consisting of cooperatives, condominiums, and rentals. The property tax that the members of each class pays is based on two factors: the tax rate, which the city sets each June; and the property’s assessed valuation, which the city announces each January. The tax rate for 2016-2017 (that is, for the fiscal year of July 1, 2016 through June 30, 2017) is 19.991 percent for Class 1, and 12.89 percent for Class 2.

Looking at the tax rates, you’d think that the city government has it in for Class 1, which makes up over 70 percent of the buildings in New York City. However, that is not the case. While Class 2 is assessed at 45 percent of value, Class 1 is assessed at only 6 percent of value.

Surprising? Well, take a look at the property taxes paid by the owners of different classes of residential property that are each valued at $1 million. A Class 1 private home pays $11,994 in annual real estate taxes (19.991 percent of 6 percent of $1 million), while a Class 2 cooperative apartment shareholder or condominium unit-owner pays $58,014 in annual real estate taxes (12.892 percent of 45 percent of $1 million). The owners of cooperatives and condominiums are paying almost five times the real estate taxes as their fellow one-, two-, and three-family homeowners. The unfairness of the system becomes apparent when the comparison is made based on value rather than location or form of housing, which is why it is rarely analyzed this way.

Inadequate Abatements

After complaints about the inequity of all this, the city enacted a co-op and condo tax abatement program in 1996. It was supposed to be a temporary measure to provide some degree of protection to co-op and condo owners until the city could permanently solve this tax conundrum. The solution was to give each qualifying co-op and condo owner a 17.5 percent abatement.
A permanent solution did not materialize, but the law was regularly renewed until June 2012, when a new requirement went into effect: in order to get the abatement, a co-op or condo owner had to make the apartment the “primary residence,” a term not defined in the law. The owners of a one-, two-, or three-family home enjoy a huge advantage because they have no residency requirement. They can live full-time in another state.

That is correct. A single-family homeowner can live in Miami, not paying New York state income taxes, and pay $11,994 in real estate taxes on his or her $1 million home, while the co-op and condo owner must use the apartment (valued at the same $1 million) as his or her primary residence and pay $47,862 after receiving the abatement. Even with the abatement, the co-op or condo resident still pays almost four times the taxes of the small homeowner.

Unfunded Mandates

Let’s look at New York City’s unfunded mandates, most of which apply to co-ops and condos but not to one-, two-, or three-family homes. Over the last few years, shareholders and unit-owners of New York City cooperatives and condominiums have spent tens of millions of dollars retrofitting their heating systems to make them more energy efficient. But what about the heating systems in all those houses that were built decades ago, or the systems in all the properties owned by the New York City Housing Authority? And co-ops and condos are now required to pay for third-party elevator inspections – following a rash of elevator accidents in public housing projects.

Should we really be letting a government that runs some of the most crime-infested housing in New York City issue edicts on how co-ops and condos, which are among the safest housing in New York, be operated? While residents are dying in city-owned housing, City Hall is having building inspectors fine co-ops $1,000 because the poles that have held the awning in front of their buildings for decades are not tall enough. Co-op and condo buildings are also fined for trying to keep cars from blocking the entrances where elderly residents enter and leave the building. City building inspectors should be inspecting the housing the city owns and making certain that they are properly maintained for their residents.

Unnecessary Legislation

Now we come to the array of legislative proposals before the New York City Council and the New York State Legislature. It all focuses on co-op admission policies. In a city where the housing court makes it virtually impossible to evict a defaulting resident, a board’s ability to control admissions is the only thing protecting shareholders and unit-owners from non-paying residents or malcontents.

With that in mind, consider the bills pending before the New York City Council and the state legislature. These bills, which could be called the “Lawyers’ Full Employment Acts,” are intended to solve a problem that does not exist: discrimination in the admissions process. In fact, three years ago, The New York Times wrote a story about a predecessor bill and indicated that the New York City Human Rights Commission (HRC) reported that only 22 discrimination claims were made by potential buyers of co-op and condo apartments in the five years preceding. Despite that, the bills presume co-op boards are guilty of discrimination.

One of the bills before the city council proposes that, if a purchase application is rejected, the board must provide a written statement of all the reasons for withholding its consent within five days. This requires identifying each element in which the purchaser’s application was deficient and requires the board to provide specific information to enable the purchaser to take steps to remedy any deficiency.

As a result, busy volunteer board members will be required to review the same application multiple times. That will undoubtedly lead to litigation against boards by rejected purchasers, who will sue to get the court to overrule the rejection. The board’s statements must be certified and sworn to by an officer of the co-op under penalties of perjury. Each board member has to state that he or she had no reason for withholding consent other than those in the statement. Who would want to serve on a board if the board member was at risk of being accused of perjury because of what another board member might have been thinking?

Any co-op that fails to comply would be liable for statutory damages (ranging from $1,000 to $25,000) in addition to the potential damages of costs, attorney’s fees, equitable remedies (for example, an injunction by the court to approve the sale), and punitive damages. Moreover, rejected purchasers or brokers can bring an action in front of the HRC, which can also award damages. Even if the HRC finds that there was no discrimination, the commission’s determination is not binding on the court, so the purchaser and the broker can still sue the board and the corporation.

Bills in Albany

One of the bills before the state legislature states that within 10 days of receiving every submission by the purchaser, the co-op must provide the purchaser with acknowledgement of its receipt. Within 45 days of that, the co-op must inform a purchaser whether its consent is granted. It also makes no difference how many applications the co-op may have to review, or what time of year it is. If it’s summer and most of the board is away, it must still meet in July and August to review applications (unless the bylaws specifically allow the board to take the summer off, in which case, the board can obtain a 14-day extension of the 45-day period).

If the prospective purchaser claims “to be aggrieved” by the board, the purchaser can file a complaint with the HRC without showing any indication of discrimination or that the purchaser is a “protected person” under the law. Boards and co-ops can be fined $1,000 to $10,000 for violations, and the HRC has the authority to award compensatory damages and attorney’s fees and require equitable relief.

Another bill before the state legislature requires that, within 10 days of receiving an application for purchase, the board must notify the applicant that the application has been received and whether it is incomplete. According to the bill, the board’s failure to notify means that the application is complete, which means that each member of the board must do an initial review of the application to determine if the application is complete or be precluded from raising an issue later. Within 45 days of the receipt, the board must either reject or approve the application and advise the applicant. Failure of the board to act within 45 days is considered approval.

This legislation assumes that board members are not employed and have nothing to do outside of waiting for applications; it also assumes that board members can clear their schedules and meet to determine that the application is complete. The 45-day period should not begin when the application is submitted but when the application is completed and all the of the board’s questions answered. The legislation also assumes that a board may get one application every few months, but there are buildings with thousands of apartments that receive numerous applications each month, making this review a full-time job.

Enough!

There is no reason for the mayor’s office, the DOB, the city council, or the state legislature to place additional burdens on owner-occupied, multifamily housing. In my opinion – borne out by the facts – this is a multipronged attack against every single co-op and condo owner. It must be stopped, or it will have dire consequences on the entire housing industry in New York. Accordingly, every shareholder and unit-owner should immediately contact his or her representatives and tell them to not support these bills and to enact bills that will treat all forms of housing the same.

So far, the government’s view of owner-occupied, multifamily housing – the most successful form of housing in New York City for both the rich and the not-so-rich – is to impose taxes, fines, and regulations. I say, enough! It’s time for co-op and condo owners to unite and refuse to be treated as second-class citizens.

Stuart Saft is chairman of the Council of New York Cooperatives & Condominiums. The opinions expressed above are those of the author and not those of the organization or its members.