Recent developments in New York City’s property tax system have raised important questions about how co-ops and condos are valued for tax purposes. A recent court decision in Tax Equity Now NY LLC v. City of New York has brought attention to the disparities in property tax assessments, particularly concerning how co-ops and condos are valued compared to rental properties. There is concern that the City’s Department of Finance (DOF) may shift from using rental comparables that contain both rent-regulated and non-rent-regulated rents to solely market-rate properties for assessing co-ops and condos. If this shift occurs, it could lead to significant increases in property taxes for many owners.
In this post, we aim to inform co-op shareholders and condo unit owners of what these potential changes could mean for their future property taxes and how the shift in tax burdens may affect other property classes.
Current Valuation Methods: Rent-Regulated Comparables
Under the current system, co-ops and condos are required by New York State Real Property Tax Law (RPTL §581) to be assessed as if they were hypothetically rental properties, rather than based on their actual sales prices. The DOF uses comparable rental properties to determine the market value for co-ops and condos. This practice typically results in lower assessed values because the comparable properties may contain rent-regulated apartments, which often generate less income than market-rate units.
As the New York City Comptroller’s Fiscal Note dated June 27, 2024, points out, “The minority of rental apartments in buildings with six or more units is market rate, which limits DOF’s flexibility in the matching stage and lowers valuations in the aggregate.” This means that most comparables are rent-regulated, leading to assessments that undervalue co-ops and condos, especially high-end properties.
For higher-end co-ops and condos, which would be unregulated, this method significantly underestimates the true market value, leading to lower property taxes.
Potential Shift to Non-Rent-Regulated Comparables
However, there is speculation that the DOF may begin using more non-rent-regulated comparables—market-rate rentals—to assess co-ops and condos. This potential change could dramatically alter the way these properties are valued, particularly for higher-end units.
According to the New York City Comptroller’s fiscal note, the current use of rent-regulated comparables results in co-ops and condos being assessed regressively. In other words, higher-valued properties are under-assessed to a greater degree than lower-valued ones.
Understanding Regressivity in Property Tax Assessments
Regressivity in this context refers to a tax system where the effective tax rate decreases as the property value increases. This leads to a disproportionate tax burden on owners of lower-valued properties. The TENNY decision highlighted this issue, stating that “the result is staggering inequities and a regressive tax system that hurts those who can least afford to pay heavy taxes.” (42 NY3d 1, 7)
Theoretically, the DOF would address this regressivity assessing higher-valued properties with market-rate comparables, potentially leading to a more equitable distribution of the tax burden.
What Co-op Shareholders and Condo Unit Owners Can Expect
If non-rent-regulated comparables are used, owners of co-ops and condos should be prepared for potential increases in property taxes. The scale of the increase will depend on several factors, including the location and market value of the property.
- High-End Properties: Owners of luxury co-ops and condos, particularly those in Manhattan or other high-value areas, are likely to see the largest increases. Properties that have been under-assessed for years based on rent-regulated comparables may now face assessments closer to their true market value. This could result in substantial increases in property tax bills.
- Mid-Range Properties: For mid-range co-ops and condos, the impact may be less severe but still significant. The shift to non-rent-regulated comparables could result in more moderate increases, depending on the availability of appropriate market-rate comparables and the current under-assessment levels.
- Lower-Value Properties: Properties with lower market values may see smaller increases or, in some cases, minimal change, as their assessments may already be closer to market-rate comparables.
Implications for Rental Apartment Buildings
In an intra-class revenue-neutral scenario, an increase in property taxes for co-ops and condos would shift the tax burden off rental apartment buildings (which are in the same tax class 2). Many owners of rental apartment buildings could benefit from this change, as their share of the overall tax burden may decrease if co-op and condo owners begin shouldering a greater portion of the taxes due to higher assessments.
Impact on Other Property Classes
In an inter-class revenue-neutral scenario, there is a statutory limit on how much the tax burden can shift between property classes. Over time, as the assessed values of co-ops and condos increase, we would expect a gradual decrease in the taxes for commercial properties (Tax Class 4). This is due to the constraints on inter-class shifts, which mean that as more of the tax burden is allocated to Tax Class 2 (residential properties with more than three units, including co-ops and condos), the share borne by commercial properties should diminish.
Conclusion
The possibility of the DOF shifting to non-rent-regulated comparables for valuing co-ops and condos could lead to significant increases in property taxes, especially for high-value properties. While co-op and condo owners may face higher taxes, rental apartment and commercial building owners could see benefits in the form of reduced tax burdens. Owners should stay informed about these potential changes and consult with legal and tax professionals to better understand how they might be affected.
See prior coverage of the TENNY decision where I was featured:
- NYC’s Unfair Property Tax (law.com)
- Ruling on NYC’s ‘Disparate’ Tax System Could Spur Reforms and Valuation Protests (law.com)
- New York Court of Appeals sets up potential overhaul for NYC property taxes | Crain’s New York Business (crainsnewyork.com)
- Court of Appeals Revives Challenge to NYC Property Taxes (therealdeal.com)
- Court Ruling Will Speed Reform of NYC Property Tax System (globest.com)
- NYC Property Tax Lawsuit Is Back On, High Court Rules | THE CITY — NYC News
- Lawsuit aiming to fix unfair NYC property taxes gets go-ahead from top state court (nydailynews.com)
- Suit on city’s notorious property tax system revived (ny1.com)
- Unfair Property Tax System in NYC Challenged in State Court | Habitat Magazine, New York’s Co-op and Condo Community
Author’s Note: This blog post is for informational purposes only. For personalized advice regarding property tax assessments and potential increases, it is advisable to consult with legal and tax professionals.