The Squeeze Is on For Co-op and Condo Boards

The squeeze is on for co-op and condo boards. The new GOP tax law has skewered taxpayers in high-cost states, including New York and New Jersey. One result of the unpopular tax law is that values of co-ops and condos are likely to decline – which in turn will depress apartment sales and cut into boards’ income from flip taxes. Property taxes keep going up. And contract talks are under way with unionized building employees, which will almost surely raise operating costs. 

“It could be a perfect storm,” says accountant Paul Cesarano, a principal at Cesarano & Khan. 

And the storm shows no signs of letting up. If sale prices do decline, shareholders and unit-owners should not expect a corresponding decrease in their property tax bills, warns Paul J. Korngold, a tax specialist at the law firm of Tuchman, Korngold, Weiss, Liebman & Lindemann. More likely, he says, taxes will continue to rise, as reform of the city's property tax system remains elusive. 

That’s because of the way co-ops and condos are valued. Under state property tax laws, those housing units are not valued based on their sale prices, or sale prices in comparable buildings. They are valued based on rents from rental buildings, Korngold says. And the value of rentals is likely to rise, if, as is predicted, a lot of would-be buyers, contemplating the tax changes, opt to rent instead. 

“As the demand for rental units increases,” Korngold says, “the law of supply and demand may cause the rents in buildings not subject to rent stabilization to increase rapidly.” 

As it is, many New York City co-ops and condos are still moving toward their actual – meaning, higher – assessed value in what’s commonly known as “transition creep.” That’s because increases in assessed value are phased in over a five-year period, Korngold explains. Given the rapid rise in rents in recent years, he says, “many co-ops and condos have an actual assessed value much greater than their transition-assessed value.”

Boards should be prepared for a backlash from residents. “If you were budgeting $1 million for taxes, and this year it goes up to $1.1 million, and everyone starts screaming at your annual meeting, you’ve got to explain it,” Korngold says. “People are calling me about this, and I explain it to them and they say, ‘That’s not fair.’ And I say, ‘Fair is not a concept under the law.’” 

Meanwhile, the four-year contract between the Realty Advisory Board on Labor Relations in New York (RAB) and the Service Employees International Union, Local 32BJ, is set to expire April 20. The contract affects some 3,000 apartment buildings in New York City and close to 30,000 building workers. 

While wage adjustments in new contracts usually reflect general inflation, benefit costs tend to have a much higher rate of increase, says Howard Rothschild, the president of the RAB. This time around, as in years past, Rothschild expects that “the union will be looking to keep and potentially enhance the benefits that are in the contract, along with a wage increase, while, from the companies’ point of view, the issue will be cost containment and control.” 

When a comparable union agreement for Westchester County expires September 31, health care promises to be a tough issue. “Health care is always a big one, as it’s getting more and more expensive,” says Brian Scally, the director of management at Garthchester Realty and a member of the negotiating committee. “In the past, there’s been no charge to union members. Some of the buildings are very much looking for some form of a payment from the members.” 

New York contract negotiations haven’t led to a strike since 1991. Rothschild says there’s no reason to be anything but hopeful that the RAB will avoid labor unrest this year. But, he adds, “who knows what will happen between now and then?”