New York City Property Tax Blueprint an Incomplete Solution
Without Proper Implementation, Proposed Changes Likely to Hurt Value of Owner-Occupied Housing
- The New York City Advisory Commission on Property Tax Reform issued a report on modernizing and simplifying the city's property tax system, but without discussing implementation.
- Although the Blueprint is aimed at reducing tax rates, improper implementation likely would decrease the value of most residential real estate, while increasing real property taxes.
- The Blueprint also opens the door to substantial tax increases without regard to impact on owners of owner-occupied housing and less-than-wealthy homeowners.
Former New York City Mayor Bill de Blasio's Advisory Commission on Property Tax Reform (the Commission) issued a report on Dec. 28, 2021, titled "The Road to Reform: A Blueprint for Modernizing and Simplifying New York City's Property Tax System" (the Blueprint). Notably, however, the proposal fails to discuss implementation which, if handled improperly, would reduce the value of all but the least expensive housing.
Although the Blueprint contains 66 pages of charts and statistics, the bottom line is that the real property taxes owed by owners of residential real estate, including the owners of co-ops, condos and 1-3 family homes valued at more than a moderate amount will likely increase significantly, even though changing the system would result in the tax rate being reduced. The claim is that enacting the Blueprint will result in the New York City Department of Finance (DOF) initially collecting the same amount of money from all homeowners as they would under the old system, but will quickly change as the assessments increase. However, the Blueprint ignores the impossibility of effectuating the plan and provides City Hall the ability to substantially increase the taxes it collects without regard to the impact it would have on owner-occupied housing and less-than-wealthy homeowners or on the cost and time to properly implement the new system.
The following three quotes from the Blueprint demonstrate the goal of the change and sum up all 66 pages:
There is considerable evidence that this [the current rent system] has resulted in the undervaluation of coop properties relative to sales-based market value, in part because (depending on the age and location of the coop building being valued) comparable buildings may fall under rent stabilization laws and regulations that constrain rental income. – Page 21
Table 6 below shows that, as with coop units, DOF value generally captures only a portion of the sales-based market value of condo parcels … Again, like with coop units, DOF values capture a decreasing share of the sales-based market value of a condo unit as sales-based market value increases, as shown in Table 7. – Page 23
However, when using a common valuation method across all property types, that being sales-based market values, class 1 represents 24 percent of value. Coop and condo buildings' market value shares go from 9 percent in DOF value to 22 percent. These buildings currently account for 15 percent of taxes paid. – Page 27
Attempting to Utilize Fair Market Value
The Blueprint proposes a system in which all residential property would be assessed at its fair market value, which would increase the assessments substantially, but result in a lower tax rate. Although that seems like a reasonable solution to the flaws in the current system, the problem is its implementation. A system based on fair market value would enable the city to raise significantly more taxes from every owner of more than moderately priced homes, which is not possible under the current system.
Moreover, it is not just co-ops and condos that would have their taxes increased significantly, but expensive 1-3 family homes would also be adversely affected as a result of the elimination of their assessment cap. All residential property would be taxed at fair market value, so 1-3 family homes would also increase once the 6 percent cap is removed.
The big question that the Blueprint leaves unaddressed is, what method would the assessors utilize in determining the fair market value of co-op apartments and condo units and therefore the taxes paid by co-op and condo owners? There are three approaches. The first is aggregating the fair market value of all the units/apartments in the building. Second is preparing an appraisal of the building based on what it would be worth if it were sold currently, regardless of whether it is a co-op or condo. The problem with the first approach is it would mean that the owners of an unimproved one-bedroom apartment on the second floor of the building would have their taxes increased when the penthouse is sold for an astronomical price, because the increased tax on the building would be allocated to each apartment or unit based on the pro rata share of the shares or common interests allocated to the unit.
It is important to note that neither the co-op shares per apartment nor the condo percentage interests per unit are based on value, but usually on comparable size and location in the building. Accordingly, the new system would hurt anyone owning a unit worth less than the most expensive unit in the building. Similarly, if the assessment is based on the aggregate value of the building (the second approach), the same problem results.
The third alternative would require that each apartment be assessed separately, which is the way assessments work in the rest of the country, but would necessitate New York City being prepared to assess 750,000 units of co-op and condo housing – a herculean task that would require an army of assessors working for a decade. It would also necessitate every co-op apartment in New York City obtaining a separate block and lot number, as well as amending the organizational documents to deal with the responsibility for real estate tax payments and relative priority of liens. Although that would be the only fair way to utilize a system based on fair market value so that no one would be hurt by the condition of someone else's apartment, it is unlikely that City Hall would undertake such an effort. It is also the only way that improved apartments would not impact the unimproved apartments. Unfortunately, based on the manner in which these things are frequently handled, the legislature would enact the law and leave it to the understaffed DOF to implement without any guidance.
Of course, all of the owners would be impacted as city- and state-mandated improvements are made because the value of the units would be affected, which creates an incentive for increased government mandates. A system based on fair market value is fair in principle, but unattainable because the value of every unit is different. And unless New York City is prepared to assess every unit, the system will never be fair. The result would be going from a system where many units are separately under-assessed to a system where many units would be over-assessed, which will create a hardship and make homes unaffordable but provide New York City more revenue.
A Question of How
Ultimately, the Blueprint ignores the biggest hurdle: how to implement a system that is fair to all of New York City's homeowners. This has never been simple, which is why the temporary co-op and condo abatement has been in place for 25 years. Advocating the utilization of fair market value has always been the goal, but the question is how to allocate the resulting taxes. The Blueprint dealt with the problem by ignoring it in its list of 10 final recommendations in the Blueprint:
- Create a new expanded residential class, consisting of 1-3 family homes, co-ops, condominiums and 4-10 unit rental buildings. The property tax system would continue to consist of four classes of property: residential, large rentals, utilities and commercial.
- Use a sales-based methodology to value all properties in the new residential class.
- End fractional assessments for all property types. Each property would be assessed at its full market value. This will result in an increase in the taxable base, and the tax rate required to generate the same level of revenue will decrease.
- Eliminate current assessed value growth caps for the new residential class and instituting a five-year transitional treatment for market value growth, whereby year-over-year changes in market values are phased-in over five years at 20 percent per year.
- Create a partial homestead exemption for primary resident owners in the new residential class. This exemption should be either a flat rate or a graduated marginal rate exemption for primary resident owners with incomes up to $500,000, with a phase-out of the benefit for owners with incomes exceeding $375,000. The Commission recommends retaining all existing personal exemption programs and eliminating the current co-op and condo abatement, since recommendations 1-4 negate the need for an abatement to address inequities between 1-3 family homes and co-ops and condos.
- Create a circuit breaker, based on the ratio of property tax to income, in order to reduce the property tax burden on primary resident owners. The circuit breaker should be for primary resident owners with a ratio of tax paid to income exceeding 10 percent and incomes below $90,550, with the benefit phasing out for incomes exceeding $58,000. The benefit amount would be capped at $10,000.
- Eliminate the current class share system and replacing it with a system that freezes relative tax rates for five-year periods. Under the new system, while the Mayor and the City Council can adjust tax rates, the tax rates for all classes may only be altered on a proportional basis within each five-year period. There would no longer be changes in tax rates driven by market value shares, as under the current system. Every five years, the City would conduct a mandated study to analyze whether adjustments are needed in order to maintain consistency in the share of taxes relative to the fair market value borne by each tax class.
- For properties not in the new residential class (rental buildings with more than 10 units, commercial parcels and utilities), current valuation methods should be maintained. There will be separate tax classes for rental buildings with more than 10 units, commercial parcels, and utilities. As noted in Recommendation 3, the Commission recommends removing fractional assessments for all these tax classes.
- For the new residential class, phase-in to the new system should occur over five years. When a property transfers during the five-year transition period, it will be fully phased into the new system the fiscal year after the transfer.
- The City should institute a mandatory comprehensive review of the property tax system every 10 years.
Conclusions and Considerations
Of course, this is just a Blueprint, which should require that the New York State Legislature study the proposal and determine whether and how to implement it. If and when the legislature does act, many stakeholders hope that lawmakers will also consider what the impact would be on the residents of New York City whose property taxes are going to increase dramatically and not rush to implement such a system because it can ultimately raise more money. With New York's population loss greater than that of any other state, the focus instead should be on how to entice people to continue living there and persuade residents of other states to move to New York City and the state. The primary reason New York has to constantly raise taxes and other revenue measures is due to the exodus of taxpaying New Yorkers, which of course places a larger tax burden on those choosing to stay.
For more information or questions regarding the Blueprint and its specific impact on you or your organization, contact the author.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.