New York's Cooperative and Condominium Community

Habitat Magazine October 2020 free digital issue

HABITAT

ARCHIVE ARTICLE

The Price of Ownership

Following my mother’s sage advice, I purchased my one-bedroom co-op apartment in Park Slope, Brooklyn, almost 30 years ago. My mom told me: “If you recover any money for the significant injuries you suffered during the New York City transit strike riding your bike from Brownsville, Brooklyn, to New York University, buy an apartment!” She explained that buying an apartment was smart – and essential – for financial security. “Tie your money up in real estate, child, because our family is too needy and you’re too damn generous!”

It is also almost 30 years since I started my career as an associate attorney at the law firm Cullen & Dykman in Brooklyn, where, after the required one-year rotation through several departments, I landed in the corporate and tax department and developed my knowledge of and passion for New York City’s property tax. The property tax fit me like a nicely worn glove. The property tax is everything that is New York: interesting (and not so interesting) buildings, complicated and thorny laws, and – best of all – numbers. Who could resist the opportunity to practice law in an area where you get to talk about New York City buildings in all their grandeur and numbers are the focal point of the argument?

So, as Habitat celebrates its 30th anniversary, let’s imagine where co-ops could be in the future by drawing lessons from where co-ops have been during the last 30 years.

“If we are to go forward, we must go back and rediscover…”

–Martin Luther King Jr.

Or perhaps it is that

“The farther backward you can look, the farther forward you can see.”

–Winston Churchill

Where We Have Been

There has been explosive growth in the number of co-op units. Over the last 30 years, the number of cooperative and condominium units has soared, as reflected in plans filed with the New York State attorney general’s office (see chart below).

Laws Adopted to Reduce Co-op Taxes

In that same time period – and thanks to the advocacy of several groups like the Council of New York Cooperatives & Condominiums, the Federation of Housing Cooperatives, and Habitat – laws in New York were adopted that provided significant benefits for co-op owners.

In 1992, owners of homes built on cooperatively owned land in three bungalow communities successfully advocated to be treated as Class 1 properties. As a result, the assessments for these properties were lowered from 45 percent to what was then the same as Class 1’s 8 percent assessment ratio. In addition, future assessment increases were capped at no more than 6 percent per year and 20 percent over five years.

In 1994, owners of co-ops with less than 11 units successfully persuaded elected officials to adopt a law that provided them with treatment similar to non-cooperatives. For this group of owners, assessment increases are capped at no more than 8 percent per year and 30 percent over 5 years. In addition, if these owners renovate their brownstones, the increase in assessed value that may result from the renovations is capped at 15, rather than 45, percent.

Finally, in 1996, co-op owners won perhaps the most revolutionary victory of all. A law was adopted that provides an abatement that reduces co-op owners’ taxes by 25 or 17.5 percent, depending on the co-op building’s per-apartment assessment. The program cost New York City $443.8 million this fiscal year and is scheduled to expire on June 30.

Co-op Prices Soared, and Crashed, Soared, and Crashed

Let’s use my co-op apartment as a starting place for understanding what has happened to co-ops in the last three decades. It is true that all politics are personal; so, too, are all property tax issues – even more so. I purchased my less-than-1,000-square-foot apartment for $90,000 in 1984. Today, the apartment is probably worth a little less than $600,000, more than six and a half times what I paid for it. (While there are not a significant number of sales in the 17-unit building, the last sale recorded was a third-floor unit with 145 shares that sold for $820,000, or $5,600 per share. I own 105 shares in the building, so my value is arguably just shy of $594,000.) Even with the relative ups and downs in the New York City real estate market, my co-op investment would have made my mom proud.

There is something to remember: co-op market values for property tax purposes bear no relationship to sales prices. The property taxes on co-ops are needlessly complicated. Using numbers from that recent sale in my co-op building, one can estimate the market value of all units in the building if they sold for the same price per square foot as that apartment. Based on that calculation, all units in the building would be worth about $12 million.

However, in the current fiscal year, New York City estimated the market value for my building as a little more than $1.8 million, only 15 percent of the market value derived from the sales price of my neighbor’s unit. New York City is mandated by state law to use a non-transparent and complicated approach when valuing co-ops. The city must value my building based on a comparable rental building. For the current fiscal year, the city chose a 20-unit rental building in nearby Prospect Heights, estimating rent of $21 and expenses of $7.35 per square foot and dividing the net income by a capitalization rate of 13.628 percent. To illustrate the point, the city estimates that I would rent my apartment for about $1,800, far less than the likely $3,000 per month market rent for an apartment like mine in Park Slope.

Using this convoluted and hard-to-explain method, New York City’s market value estimate for my unit this year, roughly $90,000, finally equals the price I paid for it back in 1984 (see chart above).

Equity Achieved

The co-op and condo abatement was enacted to reduce the disparity in property taxation between small homes and co-op and condo owners. While that disparity was thought to be significant, it has certainly been reduced over the last 30 years.

The chart above shows detailed assessment information about several small homes that sold in the last year for $600,000, the approximate value of my co-op unit. When you compare the assessments and taxes for these properties and my co-op unit, it is clear that the abatement has completely eliminated the disparity between the taxes that I pay and what a homeowner would pay. The effective tax rate for my co-op is 10 basis points lower than the average for the 15 homes that sold for $600,000 in the last year.

While my co-op has fared well, a fact I didn’t even realize until I started writing this piece, there are also co-ops that will probably continue to pay significantly more taxes than similarly valued homes. Equally disturbing, those co-ops pay taxes at a higher rate than the most exclusive and expensive co-ops in New York City. Therein lies the rub. With a system so lacking in transparency, it is virtually impossible to determine what’s fair and what’s not.

Hopes for the Future

“I cannot help fearing that men may reach a point where they look on every new theory as a danger, every innovation as a toilsome trouble, every social advance as a first step toward revolution, and that they may absolutely refuse to move at all.” But “when the past no longer illuminates the future, the spirit walks in darkness.”

–Alexis de Tocqueville

Given the significant benefits that most co-op owners have achieved over the last 30 years, it’s hard to predict what will come next. My crystal ball suggests the future will bring six things:

1. The method for valuing co-op units for property tax purposes will change, and should change. The sales price for co-op units and the city’s estimated market value is too disconnected to continue to survive in the future. Reasonable people want to understand their market value to ensure that their taxes are fair. A system that obfuscates value compromises the goals of transparency required of government, especially in a digital age.

2. The co-op and condo abatement will not continue. It is extremely difficult to continue to provide relief, the goal of which was to reduce the disparity between small homeowners and co-op owners, when that disparity no longer exists for most co-ops, especially high-priced ones in Manhattan and other parts of the city like Park Slope. Any relief, if needed, should be targeted to co-op units paying the highest effective tax rates and toward renters who need the relief most.

3. All homes, vertical and horizontal, will be valued and taxed the same way – hopefully at full market value and without assessment caps.

4. The share of taxes paid by co-ops will increase.

5. The number of co-op units will not increase, as most new residential ownership opportunities will likely be condos.

6. Co-op owners and leaders will use their incredible political clout amassed over the last 30 years to advocate for a system of fair taxation worthy of Martin Karp’s memory, even if some members will be required to pay more.

So, that is my hope, my wish list. Unfortunately, as Albert Einstein said: “Insanity is doing the same thing over and over again and expecting a different result.” I hope 30 years from now when Habitat turns 60, we’ll be able to celebrate because for Habitat’s 30th birthday co-op and condo owners committed themselves to paving the way to make New York City’s property tax system the best in the world: fair, predictable, and transparent.

 

Martha Stark, a former New York City finance commissioner, is currently a distinguished lecturer at Baruch College’s School of Public Affairs.

 

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