Property Taxes Up Close
Because property taxes for co-ops and condos are based on several items, none of which is sales value, understanding them can be challenging. Boards needs budgeting certainty, and this year’s assessments don’t offer that. We asked Eric Weiss, a partner at Tuchman Katz Schwartz Gelles Korngold & Weiss, to help make sense of this year’s numbers. Hear the complete interview at www.habitatmag.com.
HABITAT: The city reports that overall, market values for co-ops, condos, and apartment buildings rose four percent.
WEISS: There’s more to the overview. There were changes made in different areas of the city and different building types. For instance, let’s look at Queens. The assessments for Queens co-ops in 2010-11 decreased by about five percent and that was roughly a five percent drop from 2009-10. Now, in 2011-12, you’re seeing a sort of an overreaction to the under-assessment.
HABITAT: How is that?
WEISS: The assessments are basically being done by computer, so it’s a matter of the parameters you’re plugging in. Now, one thing we’ve seen in the assessment guidelines is a reduction of the cap rate by about one percent.
HABITAT: And what does that mean?
WEISS: Basically, the assessments are done through what’s known as the capitalization-of-income approach, or the income approach. And that is taking the operating income, subtracting the operating expenses (which do not include interest, appreciation, or real estate taxes), arriving at a net operating income, and then capitalizing it. You’re basically taking a bottom line – a return – and applying a cap rate to it to see what the value is to arrive at a particular return. One of the components of the cap rate is interest.
HABITAT: Go on.
WEISS: And today the banks are getting money at a cheap rate from the federal government, and that fact has created a reduction in the cap rates that the Department of Finance [DOF] is using. Now, I am not saying that they are necessarily correct, because banks are not lending it in the real estate community. Certainly not in the way they had been lending a number of years ago, you know, in terms of debt-to-equity ratios. Those have come up significantly. So, while [the DOF] says, “This is the way we’re doing it,” I’m not sure that it’s really a reflection of reality, nor does it mean that they’re applying the cap rate to proper numbers, because certainly a one-percent reduction in a cap rate won’t generate a 32-percent increase in value as we [have seen] in Queens.
WEISS: The other component is that, in co-ops, you’re basically creating a hypothetical rent. So, it’s a matter of what rents you’re going to use. And that’s determined by what comparables you pick. About five or six years ago in Jackson Heights, we saw very, very steep increases in the assessment. And it turned out that the assessor was using the income from a building which had the highest income per square foot in all of Jackson Heights, and applied that to all of the Jackson Heights co-ops.
HABITAT: Was this just arbitrary, or –
WEISS: Well, that number was a real number. Whether they should use the highest number or a middle number – you know, that’s tax policy. Where we see big, big increases is in the garden apartment co-ops in Queens. Overall, the increases on those buildings [are] about seventy percent, with a number of buildings going up over 100 percent. Again, an overreaction. They may have gone out, found a garden apartment rental throwing off tremendous rents, and ascribed that rental to all the other buildings. I can’t really tell you how this happened. I can tell you this is the most likely scenario.
HABITAT: If I’m in a garden apartment co-op, and I want to protest this increase, is it realistic that I would be able to get a significant reduction?
HABITAT: And significant means what?
WEISS: Means to get you down to a level that is a reasonable level. By reasonable, I mean you would go out and find other buildings – rental buildings – and get your assessment down into an area of those numbers.
HABITAT: So, [it would be] based on a different reality?
WEISS: Yes. We’ve seen this before. Also, around the same time that assessments in Jackson Heights went up, the garden apartments were also hit very hard. Reductions were obtained on those buildings at the tax commission, which is an independent body. They review what [the DOF] does. And I think that they review it much more carefully. They have a much more limited number of tax slots coming before them. So, whereas [the DOF] is really generating these values en masse, so to speak, the tax commission is looking at each individual parcel and going through an analysis to determine how overassessed they are.
HABITAT: And any time you protest your taxes, does it always go to the tax commission?
WEISS: That is the first step.
HABITAT: And the subsequent steps, if one needs to take them?
WEISS: State supreme court.
HABITAT: I assume that doesn’t happen that often.
WEISS: No, it does not. Part of the news to me, also, is in Brooklyn. I looked at elevator apartments in Brooklyn Heights. The change there was only 1.2 percent. Now, these are overall changes, so there are plusses and minuses.
HABITAT: What would explain the small increase in Brooklyn’s elevator apartments versus garden apartments in Queens?
WEISS: Possibly, lowering the rents that they were using for comparables. When it comes to co-ops, I get this question all the time. I’ll hear, “Well, they used gross income of one million, nine hundred thousand dollars and we only collect one million dollars in maintenance. They’re wrong.” The city is not looking at the maintenance. They are looking at comparable rental buildings, usually at an income-per-square-foot, and then applying that income-per-square-foot to the subject property. And that’s where the estimate of gross income comes from.
HABITAT: But the city got this income-per-square-foot from...
WEISS: Other buildings.
HABITAT: Who actually filed?
WEISS: Yes, who filed. All rental buildings – all the income-producing ones – have to file real property income and expense reports in late summer.
HABITAT: Is the takeaway that a rental building got less income?
WEISS: Or that the city chose to use different comps from last year to generate this imputed income.
HABITAT: So is it policy or politics?
WEISS: Policy, possibly the judgment of an individual assessor or a particular team of assessors. I mean, clearly, with the Queens garden apartments, somebody made a judgment call to use completely different numbers than were used last year.
HABITAT: Is there an assumption on the part of the city that this segment – the Queens garden apartment group – may not protest these increases?
WEISS: If we’re looking at small co-ops that are self-managed, there may be that assumption. Most co-ops that have managing agents know that there’s an opportunity to file a protest.
HABITAT: If 95 percent of those garden apartments file protests, wouldn’t that say something about the city’s performance?
WEISS: Yes, I think it would. Even more is what the tax commission will do with it. And I think, in light of an increase like that, there [are] going to be a lot of reductions. All of these assessments are really done on a building-by-building basis, but I think that there is thought behind what they’re using. For instance, here is a Queens garden apartment co-op where, last year, the assessment was based on an estimated gross income of one million, five hundred fifty-seven thousand dollars. This year, it’s based on two million, one hundred and eleven thousand dollars. Now, the likelihood of an increase in income on a building like this is pretty thin. And I can’t tell you why the city itself isn’t tracking what they’ve done in prior years.
HABITAT: They’re not tracking?
WEISS: They’re not. We came across one building where the income went down, and that’s relatively unlikely to have happened in the real world, and another building where the income went up by 30 percent, another fairly unlikely scenario in the real world, given the type of building we’re talking about.
HABITAT: Does the Department of Finance operate in a vacuum?
WEISS: Good assessment policy, in my opinion, should change but should not change radically. It should be gradual. If there’s new construction, that’s another story, but I’m talking about the run-of-the-mill building.
HABITAT: Let’s look at Manhattan. What do you see there?
WEISS: Manhattan is also kind of interesting. Park Avenue had a 15.3 percent increase; Upper West Side walk-ups overall increased 8.4 percent; Upper West Side elevator apartments had a 9.7 increase; Upper East Side walk-ups had a 9.2 percent increase; Upper East Side elevator apartments had a 12.4 percent increase.
HABITAT: I think many are going to find property tax increases difficult to understand when apartment values have decreased.
WEISS: But the assessments are not based upon apartment values. The assessments are based upon creating a residential rental building model. That’s what the law says you have to do. And, for the most part, with rent-stabilized buildings, those rents have continued to go up, even though the economy is weak. The unregulated rents in older buildings have remained pretty flat. Maybe they’ve come down a little. In the high-end buildings with high rents, those may have come down a significant amount. But they haven’t crashed. So, again, if we’re looking at rental models, most likely, income has gone up.
HABITAT: So, what would good tax policy look like?
WEISS: Well, I think good tax policy is a reflection of common sense. And I think common sense says that buildings’ values shouldn’t go up and down like a yoyo but that they [should] basically remain fairly flat, even if a building is experiencing a vacancy.
HABITAT: And, if I look at the segment on Park Avenue which has a 15.3 percent increase, would you consider that gradual?
WEISS: No, gradual would be eight to twelve percent. Part of the problem with these swings is it’s very difficult for co-ops to budget for their taxes. There’s a real uncertainty there.
HABITAT: In conclusion, what would be your advice to co-op and condo boards?
WEISS: Have somebody familiar with the assessment review process look at the assessments. There are still plenty of properties that are under-assessed. You know, there’s a bell curve. And, hopefully, in the middle are the properly assessed properties. Then, on one side, you’re going to have properties that are underassessed and, on the other side of the bell, you’re going to have properties that are properly assessed. Then, really, it becomes the assessor’s job to make the bell as narrow as possible. And that’s a good assessment role.