March 1st 2012
Mann Report Residential
The Real Estate Board of New York is bringing critical attention to an issue of great complexity. Their recently released seven minute video, appearing on www.rebny.com and titled “Property Tax Fairness—No Margin for Delay” focuses on New York City’s rising real property taxes. The subject is as convoluted as it is complicated, and as political as it is inequitable. It’s tough to even speculate how solutions will be tendered to a problem of such complex proportions.
Property taxes contribute the largest share of tax revenue to New York City. Half of the city’s annual tax receipts comes from real estate—more than the combined total collected from personal income tax (24%), sales tax (17%) and corporate tax (8%). In ten years, NYC property taxes have increased a staggering 100%. Last year, they generated $17.6 billion. The revenue is essential to the city’s coffers, but at the same time, rising taxes are an obstacle to New York’s economy as they impede growth and capital investment.
I researched the subject online and consulted with recognized tax specialists to gain a cursory understanding of a very sophisticated and sometimes mystifying tax structure. The current tax model and separation of property into 4 classes dates back to the early 80’s when the state legislature enacted S7000A or Chapter 1057 of the Laws of 1981. At that time, properties were divided into four categories:
• Class 1: 1, 2 and 3 family homes
• Class 2: Multiple dwellings of 4 units or more including rentals, co-ops and condos
• Class 3: Utilities
• Class 4: Commercial buildings, stores, hotels, garages, theaters
Three factors determine the amount of tax imposed on a property: the tax rate for the property class, the assessment ratio and the property’s market valuation. Each year, tax rates are set for each property class by the Mayor and City Council who together have the authority to make changes to the rate as needed to balance the city’s budget. Rate tables can be found online at www.nyc.gov. The Department of Finance determines the assessment ratios, and every January mails property owners a Notice of Property Value. With the exception of Class 1 properties whose market values are based on actual sales, property values for Classes 2, 3 and 4 are calculated according to income formulas. State law requires that the Department of Finance value co-ops and condos as if they were rental apartment buildings—even though co-ops and condos do not generate income. Each year, the Finance Department publishes a comprehensive online list of comparable rental properties according to size, age and number of residential units; however most tax attorneys will tell you that the selected comparables are not at all similar to the buildings being valued.
In 2011 increased assessed values resulted in property tax hikes of 7.5% for co-ops, 9.6% for condos, 2.8% for single family homes, and 8.1%-9% for rental apartments. The law caps assessments exceeding 6% in one year or 20% over 5 years for Class 1—with the exclusion of assessments due to physical improvements. There are no limitations on assessment increases for Class 2, 3 or 4 properties, but increases must be phased-in over a 5 year period for classes 2 and 4. As a result, even though actual market value may have declined, Billable Assessed Value may increase and it may take several years for assessments to catch up with market value increases or decreases.
In the city’s “Annual Report: The New York City Property Tax FY2011” prepared by the Office of Tax Policy, August 2011, lies the perplexing statement: “Because of the property Tax’s unique role in balancing the budget, it is the only tax over which the City has the discretion to determine the rate without prior legislation from the State” (p.25).
Attention must be paid to some jarring realities:
• Increasing property taxes is the default position for New York City’s budget shortfalls.
• New construction properties pay more tax than existing properties.
• Homeowners pay much less tax than owners of rental property of similar value.
• Non profit and government exemptions are huge— last year alone exceeding $10 million from tax breaks on properties owned by foreign embassies, government related entities like the MTA, religious buildings, hospitals and health care facilities, private schools and universities, foundations and charitable organizations.
• Tax abatement incentives like 421A and J51 have been eliminated for new projects.
Glenn Borin, co-manager of the real estate tax practice at Stroock & Stroock & Lavan, observes, “The basic measures of the fairness of a property tax system are that it treats like buildings alike and that the property owner can understand how the assessment will be determined. The City has made efforts to improve accuracy and transparency but it has a long way to go, and the complexity of the state law makes for a very difficult route.”
Rising, uncapped property taxes threaten the fabric of our city. They increase costs for homeowners, renters and corporations. If more and more businesses relocate to Connecticut and New Jersey with only satellite offices in New York, and if more and more developers choose to build their office buildings and rental developments in cities other than New York, both commercial and residential markets will feel the pain. With so many different interest groups to acknowledge, and an equal number of politicians straddling the fences, changes to the current tax structure seem a very long way off.