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TAX ACTION

Published: Summer 2007

PROPERTY TAX FAIRNESS STILL AN ELUSIVE GOAL

In 1990 the Council of New York Cooperatives & Condominiums created the Action Committee for Reasonable Real Estate Taxes to seek a fair and equitable property system for all New York city taxpayers. Its goal is to ensure that home owners in the cooperatives and condominiums of our city pay property taxes on a par with those paid by home owners in one, two and three family dwellings.

Since 1996, home owners in New York City cooperatives and condominiums have been eligible for an abatement on their property taxes. This abatement addressed a disparity between the taxation on 1, 2, and 3 family homes in Class 1 and cooperative and condominium apartments in Class 2. The abatement was to be replaced by a “long term plan.” After multiple extensions, the abatement is scheduled to end on June 30, 2008. The abatement program should be made permanent until a long term plan is implemented.

BACKGROUND
The real property tax is the largest single source of revenue in the New York City budget. Subject to certain limitations, this levy can be changed by the joint action of the mayor and the city council. The 18.5 % property tax rate increase in 2002 was the first change in 13 years; this year’s 7% rate reduction returns some of that prior increase to taxpayers.

As an “ad valorem” tax, the real property tax has inherent inequity in “ability to pay,” and does not have the flexibility of income- or expenditure-based taxes. There are two major real property tax policy issues: the magnitude of the tax and the equity of its distribution. The tax magnitude is dependent on fiscal needs and the judgement of city government.

HISTORY
In 1975, the New York State Court of Appeals ruled that assessments using varying percentages of market value violated the state constitution. The Real Property Tax Law (RPTL) was enacted in 1981, over the governor’s veto. This law legitimized the practice rather than dealing with its inequities. Article 18 of the Law established the four-class system that currently governs New York City real estate tax policy. At the time, cooperatives and condominiums – particularly open market units – were just a small part of New York real estate. Cooperatives and most condominiums were grouped with other multiple dwellings in Class 2. Related legislation, Section 581 of the Real Property Tax Law, required that cooperatives and condominiums be assessed as if they were rental property.

This assessment mandate is fraught with complexities. Since no two buildings are exactly alike, a certain amount of creativity must enter into the process. The Department of Finance imputes rental values to co-op and condo apartments, projecting a statistical mix of rent controlled and stabilized values in buildings that had been rentals and contained these types of units before being converted. New construction cooperatives and condominiums and those created by renovating commercial buildings are assessed based entirely on market rents in their neighborhoods–giving them very, very high assessments. And, in recent years, open market rates have been added to the mix in the older buildings, too.

Once the rental values are established, the Department of Finance determines a capitalization rate, which is applied to the ‘rent’ to determine a ‘market value’. DOF assesses the cooperative or the condominium unit at approximately 45% of this creatively established value. Other home owners in New York City – those who live in one, two or three family homes – are presently assessed at approximately 6% of the market value of their homes.
In the last 30 years there have been great changes in the demographics of our city. Although rental units still predominate in New York apartment buildings, there are currently more than half a million New York families who make their homes in cooperatives and condominiums. These resident owners span every level of the economic spectrum. And although co-ops and condos in Manhattan pay 78% of all property taxes paid by cooperatives and condominiums, today half of New York City’s cooperatives and condominiums apartments are located Brooklyn, Queens, the Bronx and Staten Island. With just one exception, every member of the City Council has constituents who live in cooperatives and all but four have condominium home owners as well.

Among the advantages of cooperative and condominium living are the opportunity for self-government and for the creation of a real sense of community. A strong disadvantage is the acknowledged fact that home owners in cooperatives and condominiums pay significantly higher property taxes than do home owners in single family homes of comparable value.

NYC CO-OP & CONDO APARTMENTS

Year   Apartments
1981   225,000
1987   307,475
1991   401,671
2007   517,211

Property values rose in the 1980s and the tax burden on cooperative apartments doubled in the decade. The real property tax became the largest item in a cooperative’s budget, in some cases, reaching 40 percent of total expenditures. Rental and commercial buildings were affected in a similar manner.

ENTER: THE ACTION COMMITTEE
The Action Committee for Reasonable Real Estate Taxes was formed in February 1990 by the Council of New York Cooperatives to address the problem of precipitously escalating real property taxes. In reviews by city and state government representatives on tax policy, it has been agreed that there should be no disparity in tax treatment between an owner-occupied one-, two-and three-family home in Class 1 and an owner-occupied co-op and condo apartment in Class 2.

In April 1992, the Action Committee released a revenue neutral recommendation for equitable distribution of the tax burden among the four tax classes. In the same period, the Department 0f Finance conducted a major study of real estate tax policy.

In early 1993, the City Council called for an independent commission to investigate real estate tax policy. Representatives of Class 2 and Class 4 property, including the Rent Stabilization Association and Real Estate Board of New York, joined the Action Committee in making a recommendation to the commission. The commission submitted its report at the end of 1993, confirming the disparity between Class 1 and Class 2 homeowner property taxation.

In 1996, an abatement program for home owners in New York city cooperatives and condominiums was embodied in State legislation introduced at the request of the Mayor and City Council. It was passed in June 1996 and became Section 467-a of the RPTL. To provide time for developing a longer-term plan, the legislation provided for three years of tax abatement to non-sponsor resident owners of three or fewer apartments. The city was mandated to present a long term plan by December 31, 1996, “to address the disparity in real property taxation between residential real property in Class 1 and residential real property in Class 2 held in the cooperative or condominium form of ownership.”

EXTRA HELP FOR UNITS OF LOWER VALUE
The legislation designated two levels of property tax abatement: 25% for buildings where the average assessed value per apartment was $15,000 or less and 17.5% for apartments with higher assessments. At that time, the $15,000 slice appropriately granted higher protection to approximately 40% of the universe in apartments housing lower income New Yorkers. From 1997 to 2007, as assessments increased, fewer and fewer building qualified for the 25% abatement. Each year, more families have been hit at the same time with an increase in their property taxes and a decease in their abatement. Now less than 3% of cooperatives and condominiums qualify for the 25% abatement. CNYC has urged the City to look carefully at those buildings that have fallen over this ‘cliff’ and to see what can be done to help them.

ADDITIONAL HELP FOR HOMEOWNERS
There have been additional measures enacted to ease the tax burden of home owners. In 1998, the State instituted the STAR program, providing home owners – including those in cooperatives and condominiums – with an exemption from a portion of school taxes on their primary residence. Information collected for the property tax abatement program enabled the city to include cooperative home owners in this program. Each home owner must file their own application for STAR. The records for STAR have since been used as the basis for the city’s $400 tax rebates to home owners and for similar benefits from the State.

ANOTHER EXTENSION?
The current abatement program sunsets on June 30, 2008. With a decade of precedent, it is likely that the City and the State will find a way to continue this program beyond that date, but, in the absence of certainty, cooperatives will need to set realistic budgets for the year 2008, anticipating the possibility of a return to full property taxes.

Through the Action Committee for Reasonable Real Estate Taxes, the Council of New York Cooperatives & Condominiums will continue its crusade for property tax fairness. The Action Committee will do its best to provide a constructive contribution to the evolution to an equitable real property tax policy for all tax payers. If the best proposal the City can offer is the abatement program, we will urge modifications such as the one discussed above to distribute benefits more equitably. In addition, we will seek to make the abatement program permanent, to end the uncertainty of having to repeatedly seek extensions.

To achieve these goals, CNYC and the Action Committee may have to call upon members to contact their city and state legislators in support of the program. Members will be kept updated through this Newsletter, the CNYC website and periodic memos and notices of CNYC and of the Action Committee for Reasonable Real Estate Taxes.

 
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