EXPLAINING THE 2011 TAX INCREASE

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The city reports that overall, market values for co-ops, condos, and apartment buildings rose four percent.

ERIC WEISS: There’s more to the overview. There were changes made in different areas of the city and different building types. For instance, let’s look at Queens. The assessments for Queens co-ops in 2010-11 decreased by about five percent and that was roughly a five percent drop from 2009-10. Now, in 2011-12, you’re seeing a sort of an overreaction to the under-assessment.

How is that?

The assessments are basically being done by computer, so it’s a matter of the parameters you’re plugging in. Now, one thing we’ve seen in the assessment guidelines is a reduction of the cap rate by about one percent.

And what does that mean?

Basically, the assessments are done through what’s known as the capitalization-of-income approach, or the income approach. And that is taking the operating income, subtracting the operating expenses (which do not include interest, appreciation, or real estate taxes), arriving at a net operating income, and then capitalizing it. You’re basically taking a bottom line — a return — and applying a cap rate to it to see what the value is to arrive at a particular return. One of the components of the cap rate is interest.

And today the banks are getting money at a cheap rate from the federal government, and that fact has created a reduction in the cap rates that the Department of Finance [DOF] is using. Now, I am not saying that they are necessarily correct, because banks are not lending it in the real estate community. Certainly not in the way they had been lending a number of years ago, you know, in terms of debt-to-equity ratios. Those have come up significantly. So, while [the DOF] says, “This is the way we’re doing it,” I’m not sure that it’s really a reflection of reality, nor does it mean that they’re applying the cap rate to proper numbers, because certainly a one-percent reduction in a cap rate won’t generate a 32-percent increase in value as we [have seen] in Queens.

The other component is that, in co-ops, you’re basically creating a hypothetical rent. So, it’s a matter of what rents you’re going to use. And that’s determined by what comparables you pick. About five or six years ago in Jackson Heights, we saw very, very steep increases in the assessment. And it turned out that the assessor was using the income from a building which had the highest income per square foot in all of Jackson Heights, and applied that to all of the Jackson Heights co-ops.

Was this just arbitrary, or —

Well, that number was a real number. Whether they should use the highest number or a middle number — you know, that’s tax policy. Where we see big, big increases is in the garden-apartment co-ops in Queens. Overall, the increases on those buildings [are] about seventy percent, with a number of buildings going up over 100 percent. Again, an overreaction. They may have gone out, found a garden apartment rental throwing off tremendous rents, and ascribed that rental to all the other buildings. I can’t really tell you how this happened. I can tell you this is the most likely scenario.

Part of the news to me, also, is in Brooklyn. I looked at elevator apartments in Brooklyn Heights. The change there was only 1.2 percent. Now, these are overall changes, so there are plusses and minuses.

What would explain the small increase in Brooklyn’s elevator apartments versus garden apartments in Queens?

Possibly, lowering the rents that they were using for comparables. When it comes to co-ops, I get this question all the time. I’ll hear, “Well, they used gross income of $1,900,000 and we only collect $1,000,000 in maintenance. They’re wrong.” The city is not looking at the maintenance. They are looking at comparable rental buildings, usually at an income-per-square-foot, and then applying that income-per-square-foot to the subject property. And that’s where the estimate of gross income comes from.

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