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Pay the Prevailing Wage or Forfeit the Tax Abatement?

Bill Morris in Bricks & Bucks on November 24, 2021

New York City

Property tax abatement, prevailing wage, non-union employees, co-op and condo boards.
Nov. 24, 2021

Gov. Kathy Hochul has signed a bill that will require co-op and condo boards to pay prevailing wages to their building staffers in order to receive the coveted property tax abatement. The law doesn’t go into effect on April 1, 2022, the beginning of the state’s fiscal year, but it has already produced surprises.

The initial reaction to the bill was that most buildings with non-unionized staffs would raise their pay to prevailing-wage levels in order to keep the tax abatement, which ranges from 17.5% to 28%, depending on the average assessed value of units in the building. But when Steven Hoffman, co-president of Hoffman Management, crunched the numbers at a 60-unit co-op he manages on the Upper East Side, he came to the opposite conclusion.

“It depends on the makeup of the building,” Hoffman says, noting that the abatement, crucially, is available only to shareholders and unit-owners who use the apartment as their primary residence. “In this building, there’s a large percentage of shareholders who are not primary residents. You don’t have to be good at math to figure this one out.”

The building has five employees, three non-union, who earn a total of $372,000. (Buildings with unionized staffs will not be affected by the new law.) Paying the three non-union employees the prevailing wage, according to Hoffman’s calculations, would boost the payroll to $531,000. Since so many of the shareholders are not primary residents, the co-op corporation gets a relatively modest $75,000 abatement on its property tax bill – not nearly enough to cover the $159,000 in increased wages and benefits. The co-op board, wisely, is going to forfeit the abatement, the lesser of two evils.

Which leads Hoffman to deliver a prediction and a bit of advice: “Some boards are going to massage work schedules to try to reduce payroll, or they might eliminate an employee to make the calculation more favorable. Boards need to examine the overall impact on every resident – not just the ones getting the abatement. And if it’s a building with a lot of employees, you’ve got to see how that affects the math. I don’t think boards should have a knee-jerk reaction.”

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Leni Morrison Cummins, a partner at the law firm Cozen O’Connor, agrees. “It’s a two-part analysis,” she says. “First, what is the difference between current total compensation and how much you need to increase it to reach the prevailing wage? It’s not just about wages.” In addition, she notes, boards will need to factor in such benefits as medical and hospital care, pensions, insurance for disability, sickness and accidents, and vacation and holiday pay – and anything else not required by local, state and federal laws. Sick leave, for example, is required by law.

“All that will count toward the calculus,” Cummins says. “If it’s a heavy pied-a-terre building” – like Hoffman’s Upper East Side co-op – “it probably won’t make sense to pay the prevailing wage. Then again, a lot of buildings pay close to prevailing wage because they’re trying to keep their building staff while warding off the union. It might make sense for them to pay the prevailing wage and keep the abatement.”

The situation is slightly different for co-ops and condos. Co-op corporations receive an abatement on their tax bill, which boards can distribute to eligible shareholders. Many boards then levy an assessment equal to the abatement, boosting the corporation’s bottom line at no added expense to shareholders. Condo unit-owners, who pay their property taxes individually, are direct recipients of the abatement.

A building can continue to collect the tax abatement without paying the prevailing wage if the average unit assessed value is $60,000 or less, or if the average unit assessed value is between $60,000 and $100,000 and the building has fewer than 30 units. (The assessed value, which is used to compute the property tax bill, is a fraction of the market value.) Boards that receive the abatement must sign an affidavit stating that they are paying the prevailing wage to all employees for the duration of the abatement.

“Every building has its own personality,” Cummins says, “and boards need to make sure they get this calculation right. Boards that make a decision based on a hunch and don’t do their due diligence may not be protected by the business judgement rule. Boards need to do their homework.”

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