Analysis of NYC Advisory Commission on Property Tax Reform as it relates to Co-ops and Condominiums

The NYC Advisory Commission on Property Tax Reform issued its preliminary draft report in January 2020 and made 10 significant reform recommendations of the NYC Property Tax system. Below is an analysis prepared by Bob Friedrich of the relevant recommendations relating to co-ops and condos. Abbreviations used below: AV = Assessed Valuation, FMV = Fair Market Value

1. The Commission’s Report states with conclusive data that the current system of calculating AV’s in “new and high-priced buildings” and multi-million-dollar co-ops/condos in Manhattan, Brooklyn and other gentrified areas that have seen soaring property values, remain significantly under assessed in relation to their market values. In other words, when the property taxes of these properties are compared to other coop-condos of lesser value, their taxes remain lower as a % of their market value. The Commission purports to solve this problem by moving class 2 properties (Co-ops, Condos and small rental buildings with 10 or fewer units) into a new Residential Class that will include Class 1 properties of 1-3 family homes. This change would put all residential properties into a similar property class. PCCC RESPONSE: We agree with the conclusion and support the recommendation.

2. In order to create a fair system of AV’s, the Commission proposes a new Residential Class of properties that will be assessed by a “Sales-Based” methodology. FMV will be used to OBJECTIVELY determine AV and will replace the current system that relies on complicated and subjective formulas that treat co-ops and condos as if they are rental properties and then tries to establish their valuations. (See page 4 for a description of how this is done). PCCC RESPONSE: We support the creation of a new Residential Class. The challenge of moving coops and condos into this new Class of properties that will be assessed at FMV is that without any other adjustments, middle class co-ops will see their property taxes increase over current levels. That is because assessing co-ops and condos at FMV results in higher valuations than under the current system. In addition, the current tax rate on the AV for co-ops and condos is 12.473% and will likely rise to 21.167% which is the current tax rate on 1-3 family homes in Class 1. This will cause significant increases in coop-condo property taxes, even when taking into consideration the technicalities of the different Assessment Ratios of Class 1 and Class 2 properties. The Commission acknowledges this challenge and recommends two AV adjustments to offset this likely rise in taxes. See #4 below for an explanation of the Homestead Exemption and Circuit Breaker adjustments.

3. The Commission Report proposes ENDING all AV caps on all residential properties in this new Residential class including the co-op/condo Abatement. This means the current AV cap on 1-3 family homes of 6% per year or 25% over 5 years will end. Also ending will be the 8% per year or 30% over 5-year cap on co-ops and condos that comprise 10 or fewer units. PCCC RESPONSE: We support these changes provided that the new Homestead Exemption is set at levels that will insure there are no increases on middle class coop and condo property taxes over current levels. 

4. The Commission acknowledges that their proposed recommendations will lead to higher property taxes on most coop-condos. In order to avoid this on low income and middle-class properties, they create 2 new AV Adjustments: 1) A “Circuit Breaker” will be applied to limit the property tax burden on low-income primary resident owners. The AV increase will be based on a ratio of property taxes to income, 2) A partial “Homestead Exemption” for primary resident owners will be based on income below a certain threshold and will replace the coop-condo abatement. The commission recognizes the importance of the Homestead Exemption, stating “the breadth and depth of this partial exemption are among the outstanding issues that the Commission will explore with the goal of achieving a balance between homeowner relief and the Commission’s mandate for revenue neutrality”. PCCC RESPONSE: The Commission’s proposal to value all coops-condos at FMV as a way to fix the undervaluation of high-end properties that pay very low property taxes in relation to their FMV will, unfortunately, impact middle-class coop-condo owners by increasing their property taxes above current levels. In order to mitigate these middle-class property tax increases, the Commission has recommended the implementation of a partial Homestead Exemption. This is an essential component of the Commissions Report that will have the greatest impact on middle-class coop-condo owners. The income levels set for recipients of the Homestead Exemption will determine Winners and Losers of this proposal. If the threshold for the Homestead Exemption relief is not set at proper levels to capture middle class co-op/condo owners, then these owners will be among the BIG LOSERS of the Property Tax Reform proposal. Even the Commission acknowledges the importance of this when it says, “The creation of this new partial exemption…would eliminate the need for the Coop-Condo Abatement Program, which was originally enacted to offset inequities between Class 1 and Class 2 coop-condo owners… with a more equitable and targeted form of relief”.

5. To mitigate the effects of all these AV and FMV changes, the Commission recommends that they be phased in over 5 years or 20% per year for current owners. However, the Commission recommends an immediate transition to FMV whenever a residential property is sold. In other words, if a property is sold before the 5-year phase in, its tax bill will be reset at higher levels as if there was no 5-year phase in. PCCC RESPONSE: The immediate property tax reset for new home sales will dramatically increase property taxes on 1-3 family homes and co-op-condos that are sold. This will inevitably put downward pressure on sale prices since new homeowners will immediately be subject to significantly higher property taxes. Since property tax deductions are now limited by the IRS, this will be a double whammy for new buyers and will decrease sale prices for those selling their homes. 

6. The Commission recommends that the currently complicated Property Tax System of 4 Classes of property each assigned with a specific % of income that must be generated by each class, should be frozen for 5 years after which time the City should conduct a study to determine if there is a better way to do this. PCCC RESPONSE: We can support this recommendation if it does not unfairly or inequitably raise property taxes on middle class coops and condos.