Should You Raise Staff Wages Or Keep Your Property Tax Abatement?

The clock is ticking, loudly, for the boards at nearly 4,000 co-ops and condominiums in New York City. By April 15 they must answer a pair of questions that could have ramifications for years to come: Should we pay our staff prevailing wages so that some residents — the ones who use their apartment as their primary residence — keep receiving the co-op and condo property tax abatement? Or should we forfeit the abatement in order to keep everyone’s payroll costs under control?

No matter which way boards go, it’s sure to cost money — either from the loss of a cherished tax break or from additional payroll costs. As one tax lawyer put it, “You’re damned if you do and damned if you don’t.”

How did co-op and condo boards wind up in this predicament?

Building Makeup Matters

It all began on Labor Day 2021, when Gov. Kathy Hochul signed a bill that will prevent shareholders and unit-owners from receiving the co-op and condo property tax abatement if their building’s service employees are not paid the prevailing wage for their job category. Service employees are defined as people who work at the building at least eight hours per week, including door and maintenance personnel, porters, groundskeepers, elevator operators and others. Prevailing wages for various trades are set by the city comptroller.

A building can continue to collect the tax abatement without paying the prevailing wage if the average unit assessed value is $60,000 or less, or if the average unit assessed value is between $60,000 and $100,000 and the building has fewer than 30 units. (The assessed value, which is used to compute the property tax bill, is a fraction of the market value.) For all buildings that wish to continue receiving the abatement, the board has until April 15 to submit a notarized affidavit stating that it will pay prevailing wages for the duration of the tax abatement.

The affidavits are due, coincidentally, five days before the expiration of the current four-year contract between building owners and members of Local 32BJ of the Service Employees International Union. Members of 32BJ, the city’s biggest service employees union, are paid prevailing wages, though some members of other unions are not. Under the soon-to-expire contract, the average annual wages and benefits for a doorman or porter total more than $96,000.

The initial reaction to the new rule was that most buildings with nonunion staff would raise their pay to prevailing-wage levels in order to keep the tax abatement, which ranges from 17.5% to 28%, depending on the average assessed value of units in the building. (In the past, many co-op boards levied an assessment equal to the abatements, which enhanced the corporation’s bottom line at no cost to shareholders; in condos, the abatements have gone into unit-owners’ pockets.)

But when Steven Hoffman, co-president of Hoffman Management, crunched the numbers at a 60-unit co-op he manages on the Upper East Side, he came to a conclusion that ran against the initial reaction.

“It depends on the makeup of the building,” Hoffman says, noting that the abatement is available only to shareholders and unit-owners who use the apartment as their primary residence. “In this building, there’s a large percentage of shareholders who are not primary residents. You don’t have to be good at math to figure this one out.”

The building has five employees, three of whom are nonunion, who earn a total of $372,000. Paying the three nonunion employees the prevailing wage, according to Hoffman’s calculations, would increase the payroll to $531,000. Since so many of the shareholders use their apartments as a pied-à-terre, the co-op gets a relatively modest $75,000 abatement — not nearly enough to cover the $159,000 in increased wages and benefits. Hoffman says the co-op board is going to forfeit the abatement.

Which leads Hoffman to deliver a prediction and a bit of advice: “Some boards are going to massage work schedules to try to reduce payroll, or they might eliminate an employee to make the calculation more favorable. Boards need to examine the overall impact on every resident — not just the ones getting the abatement. And if it’s a building with a lot of employees, you’ve got to see how that affects the math. I don’t think boards should have a knee-jerk reaction.”

Leni Morrison Cummins, a partner at the law firm Cozen O’Connor, agrees. “It’s a two-part analysis,” she says. “First, what is the difference between current total compensation and how much you need to increase it to reach the prevailing wage? It’s not just about wages.” In addition, she notes, boards will need to factor in such benefits as medical and hospital care; pensions; insurance for disability, sickness and accidents; and vacation and holiday pay — and anything else not required by local, state and federal laws. Sick leave, for example, is required by law.

“All that will count toward the calculus,” Cummins says. “If it’s a heavy pied-à-terre building, it probably won’t make sense to pay the prevailing wage. Then again, a lot of buildings pay close to prevailing wage because they’re trying to keep their building staff while warding off the union. It might make sense for them to pay the prevailing wage and keep the abatement.”

The Hits Keep Coming

One sticking point for many boards is the uncertain future of the tax abatement itself. Last summer, Hochul extended the abatement through June 30, 2023. That date was very much on the minds of the board members at a Brooklyn co-op when they tackled this issue.

“They had just completed a major capital project and had to increase maintenance and impose an assessment,” says the board’s attorney, Ingrid Manevitz, a partner at the law firm Seyfarth Shaw. “The board was upset that this change was sprung on them. The hits just keep on coming. They wanted to keep their longtime resident super happy, but they would have had to nearly double his salary with no guarantee that the abatement will last past June 2023, which would have required a maintenance increase. But not doubling his salary and forgoing the abatement would still require a maintenance increase. They looked at ways they could cut expenses and save money, but there’s not a lot of fat to trim.”

In the end, the board chose the lesser of two evils: the smaller maintenance increase to cover the loss of the abatement.

“It was primarily a mathematical decision,” Manevitz says, “and one the board felt it could stand behind. They have to consider the welfare of all of the shareholders. If they had increased maintenance enough to keep the abatement and then the abatement disappeared, how would they explain the increased payroll to the shareholders?” 

A Balancing Act

Sometimes lost amid all the hard numbers is a softer factor, one hinted at in the Brooklyn co-op: the bonds that develop between residents and their service employees. “We advise our clients both on financial and human factors,” says Drew Donovan, a CPA who is the chief operating officer at Choice New York Management. “Some buildings may lose money by paying prevailing wages, but they want to keep their super and doormen happy, and so they’re willing to pay more in wages than they get from the abatement.”

Michael Esposito, a shareholder at the accounting firm WilkinGuttenplan, is also attuned to the human factor. “A lot of longtime employees are like family,” he says. “One of the reasons people stay in buildings is because of the relationships with the staff. So some boards, fearful they’re going to lose good people because they’ll go where they can get prevailing wage, might decide to raise wages. It’s a balancing act.”

A balancing act without any easy moves. Given the hard decisions facing co-op and condo boards, that tax lawyer got it exactly right: This is one case where boards are damned if they do and damned if they don’t.