Property Tax Tussle

Five years ago, 50 high-priced co-op and condo units in Manhattan and Brooklyn won dubious notoriety as some of the city’s most grossly undertaxed properties. The Furman Center, at New York University (NYU), published a list of the apartments to highlight the severe inequities in the city’s property tax system. Every unit had recently sold for more – and often many times more – than the city’s estimated value of the entire building in which it was located. In one of the more egregious examples, a co-op in a 13-unit building on the Upper East Side had sold for $50 million, while the building as a whole was valued at less than $16 million. The undervaluation translated to a hefty property tax savings for the very wealthy owners.

Those findings added yet more weight to an already substantial body of evidence that New York City’s property tax system is unfair, irrational, and in dire need of reform. Yet not since the administration of Mayor David Dinkins, in the 1990s, has there been any serious effort at overhauling the system. As the inequities have only worsened over decades of inertia, a coalition called Tax Equity Now New York (TENNY) is finally suing both city and state leaders, hoping to force them to act.

Their lawsuit, filed last year in state supreme court, claims that the city’s property tax system violates state constitutional and statutory mandates requiring taxes to be imposed uniformly on like properties, and to be based on realistic valuations. Further, it claims that the inequities place a disproportionate tax burden on racial minorities, in violation of the Fair Housing Act. Among the suit’s many criticisms of the system is what it calls the “pervasive undervaluing” of co-ops and condos relative to rental buildings, which, it says, essentially shifts a disproportionate share of the tax burden onto the backs of renters. Meanwhile, co-op and condo advocates charge that the most undervalued properties in the city are one-, two-, and three-family homes.

Strange Bedfellows

TENNY is an unlikely coalition. Its members range from social justice organizations such as the Black Institute to civic groups such as the Citizens Budget Commission to major building owners and operators such as The Durst Organization. Heading up the group is Martha E. Stark, a former New York City Department of Finance commissioner.

“No one is disputing that the system is inequitable and broken and needs to be fixed,” says Stark, who is now a professor at NYU’s Wagner Graduate School of Public Service. “But no one’s done anything. It’s time for the court to provide guidance about what would make the system legal.”

Should the court ultimately do just that – and that’s still a very big “if” – it’s likely that comprehensive reform will mean higher taxes for buildings in currently undervalued areas. The property owners likely to take the biggest hit – and a primary reason why politicians have avoided pursuing a fix – are owners of one-, two-, and three-family homes.

“Owners in co-ops and condos pay multiple times what those homeowners pay,” says Mary Ann Rothman, the executive director of the Council of New York Cooperatives & Condominiums (CNYC). Currently, those single and multi-family homes account for about 31 percent of market value but pay only 15 percent of the tax burden, according to 2016 testimony by George Sweeting, deputy director of the New York City Independent Budget Office, appearing before the state assembly’s Committee on Real Property Taxation.

City and state lawyers, trying to forestall any court intervention, are seeking to have TENNY’s lawsuit dismissed. (A similar lawsuit filed in 2014 was thrown out after the court concluded the plaintiffs lacked standing.) Mayor Bill de Blasio has said he doesn’t believe the courts are the place to resolve the issue and has repeatedly promised to pursue an overhaul in his second term. “You’re going to hear some very specific actions soon,” he told Crain’s in January.

James Parrott, the director of economic and fiscal policies for The New School’s Center for New York City Affairs, believes that the appointment of a representative body of civic leaders to work through the issue would be far preferable to a court-ordered solution. However, Parrott notes, because any major changes would have to be voted on in Albany, “leaders there would need to signal at the beginning of the process that they’ll defer to New York City leaders and ratify what they come up with.”

Straight Outta Byzantium

The current byzantine system, incomprehensible to most New Yorkers, has its roots in a 1981 legislative action that divided city properties into four classes. Class 1 consists of one-, two-, and three-family homes, as well as condos with three or fewer units. Class 2 is for all other residential properties, including co-ops, condos, and rental buildings. Class 3 is for utilities, and Class 4 is for commercial.

The effective tax rates for each class vary, for a host of complicated reasons. But two peculiarities of the system in particular account for much of the disparity. One is a state law limiting annual assessment increases on Class 1 properties to no more than 6 percent, or 20 percent over five years, regardless of how fast market values are rising. This is why homeowners in the city’s priciest neighborhoods, like Park Slope and Greenwich Village, pay a much lower effective tax rate than homeowners in neighborhoods that are not appreciating rapidly. The other is a state law that requires co-ops and condos to be valued as if they were rentals. City assessors must compare them to rental buildings comparable in age, size, and location. “That might have been OK in 1981 when there weren’t very many co-ops,” says Stark, “but it makes absolutely no sense to compare them to rental properties now. It significantly understates the value of high-end units.”

Parrott says the city finance department has been working to narrow that gap by “casting a wider geographic net” when looking for comparables. “We’ve seen the relative assessments for co-ops and condos rise a little bit faster in recent years compared to rental units,” he says. According to data cited by Sweeting in his testimony, the condos benefiting the most from market-value “discounting” are in Brooklyn’s Prospect Heights and in Manhattan’s Flatiron District, Chelsea, Union Square, and the Upper East Side. Those with the smallest market-value discounts are in Jamaica, Briarwood, and Jamaica Hills in Queens, and in Parkchester in the Bronx.

On top of that, the city’s co-op and condo abatement, adopted in the 1990s, actually “rewards” this undervaluation, says Stark. Under the formula, the lower the assessed value, the higher the abatement percentage. This system ends up putting “a very high burden on renters and contributes to high rents throughout the city,” says Jordan Barowitz, the vice president of public affairs for The Durst Organization, which owns almost 2,000 rental units in Manhattan. “Renters are subsidizing wealthier condo and co-op owners at a rate that can sometimes be two or three times greater.”

Rothman, of CNYC, says the organization agrees that the current system is unsatisfactory and in need of a total overhaul. “We can’t nibble at the edges and do piecemeal repairs,” she says. However, the group is a fierce advocate for the abatement program, and Rothman says that will continue as long as the current property tax system is in place because, without it, “the cost of living within the confines of this city would skyrocket even further.” Pressure for reform appears to be growing, as state lawmakers and city council members have publicly pushed the mayor to follow through on his promises for action in recent months. But TENNY isn’t waiting any longer. Stark notes that the lawsuit doesn’t call for any specific methods of resolution. Rather, the group is looking to the court to identify the structural problems in need of correction, thereby providing “helpful guidance and opportunity to politicians, so they can do something.”