When property values go down, it’s only natural to expect your property taxes to go down as well. But when New York City’s Department of Finance (DOF) sent out its tax assessment notices on Jan. 15 for the upcoming 2021-22 fiscal year, many co-op boards were in for an unpleasant surprise: Despite declines in the market value of their properties, their property taxes are going up.
Even given the city’s endlessly confusing property tax system, the numbers just don’t seem to compute. First, because the DOF isn’t working with current data – there’s a time lag of two years – its determination of market rates is somewhat arbitrary. But a more important reason for the disconnect is something that’s buried in your annual property tax bill. It’s called Transitional Assessed Value. Simply put, a fraction of the increase or decrease in a building’s assessed value from the previous year is factored into its assessed value for the current year; the assessed value for any given year also reflects the five previous years of ups and downs. In an up market, it’s possible that this Transitional Assessed Value will increase for five consecutive years. Think of these annual changes as “ribbons.” Because of that five-year spread, any decrease in market value – that is, replacing just one of those ribbons with a minus charge – won’t be immediately reflected in your current tax bill.
Bottom line: Don’t assume you’ll catch a break in 2021-22 because of the 2020 downmarket. “There are going to be situations where the DOF will say, ‘Look, we dropped your actual assessed value by a million dollars,’ ” says Paul Korngold, a partner at the law firm Korngold Powers. “And people are going to think, ‘Well, my taxes are going down.’ But you’re not likely to get that full million-dollar reduction. And in many cases, buildings that get a reduction in their market values may still end up paying more in real estate taxes.”
It Gets Tricky
For Class 2 residential properties – which includes co-ops and condominiums – with 11 units or more, a byzantine formula is used to arrive at your property tax bill. The first step is determining market value. Because co-ops are considered rental buildings, their market value is determined by their income-earning potential based on similar rental properties. Second, multiply market value by 45% to arrive at your actual assessed value. Step 3, however, is where the calculations get tricky. The law mandates phasing in 20% of the change in your assessed value each year over a five-year period, which yields your Transitional Assessed Value. Whichever is lower, the assessed value or the transitional value (minus exemptions), is your building’s taxable value. Finally, multiply that amount times the tax rate to get your property tax bill.
The Transitional Assessed Value system, which dates back to 1983, benefits building owners in an upmarket by essentially evening out five years of normal market gains, thereby lessening the tax pinch when actual assessed values keep rising. If increases take place year over year, only 20% of those increases are felt in any given year. And because transitional value phase-ins are just one-fifth of assessment increases, the transition will usually lag behind assessed value, Korngold says, adding, “People are all too happy to pay on it, since it’s almost always less than the assessed value.”
All that, however, is turned on its head when property values decline, as they have during the pandemic. “Even if your assessed value suddenly drops, you may still be getting an increase in your Transitional Assessed Value because that amount just keeps accumulating from the previous years when your actual assessed value was higher,” Korngold says. In other words, there would have to be a significant drop in property values in any given year to offset the multiple transitional assessment phase-ins that have already gotten baked into your annual tax bill. “The system,” Korngold says, “is very cruel in a downmarket.”
Case in point: the 15-story, 139-unit Cathedral Parkway Apartments co-op on the Upper West Side. Despite a roughly 4% drop in actual assessed value, from $10,494,450 in 2020-21 to $10,058,150 in 2021-22, the property’s transitional value increased by more than 9%, from $8,805,150 to $9,627,536. After deducting $50,970 in property-tax exemptions, the building’s taxable value shot up from $8,754,180 to $9,576,566, a punishing increase of $822,386, or 9.4%.
“There can be, and often is, a lingering effect of assessment increases from prior years into current tax bills,” says Joseph B. Giminaro, a partner at the law firm Stroock & Stroock & Lavan. “That’s another reason why, even if you look at a percentage assessment reduction in the double digits, you may not see that translate directly into a double-digit cut in your actual tax bill. There’s not necessarily a straightforward and direct link.”
Time to Call an Expert
Still, the actual numbers for the pandemic-battered real estate market are sobering enough. One day before the DOF released the 2021-22 tax assessment figures, Mayor Bill de Blasio announced that the city’s property tax revenues are projected to drop by $2.5 billion next year, the largest such decline in three decades. But how does that square with the fact that some co-ops may be paying more taxes, in spite of falling property values?
“He isn’t being disingenuous,” says Martha Stark, a former city finance commissioner who is now a professor at the Wagner School of Public Policy at New York University. “What the mayor means is that he had anticipated overall revenues growing by more than $1.1 billion in fiscal year 2022, which starts this July. Instead, he anticipates that revenue will decline by $1.3 billion.” What’s more, the projected drop is largely driven by the sharp decline in the value of office buildings and hotel properties, not co-ops. According to the city’s statistical summary, the average market value for co-ops is down 10.16%, but factor in the Transitional Assessed Value phase-ins, and some buildings may still see their taxable value go up.
However the numbers are parsed, the anticipated revenue shortfall could spell bad news for boards when the new property tax rates are released later this year. While the transitional value calculations are complicated, the tax rate isn’t. The higher it is – it’s currently 12.73% – the bigger your tax bill. “Normally the city uses the prior year’s tax rates to calculate the first half of the tax bill for the new tax year, which goes out on July 1,” Giminaro says. “And then, between July and the end of the calendar year, the City Council typically approves a new rate that goes into effect for the second half of the bill, which goes out the following January. But given this unprecedented reduction in taxable assessments, the budgetary realities of the city may create the need to raise the tax rate. And it is possible that the city will need to revisit the tax rate situation before July.”
While boards can go to the DOF website to see their property tax assessment data, Korngold, the attorney, suggests bringing in experts to help make sense of things. “Most larger buildings have tax certiorari lawyers,” he says. “If you don’t, it’s a good idea to get one because even the best managing agents don’t really understand where these Transitional Assessed Value numbers come from.” Just don’t expect to find any errors in the DOF’s calculations. “I’ve yet to see one,” Korngold says. “But this transition business is a very complicated and confusing system, especially with all these years of assessments going back. Boards need help wrapping their heads around it.”