Following on Benjamin Franklin's assertion that “nothing can be said to be certain, except death and taxes,” in New York City, homeowners are feeling a level of uncertainty, at least as to the tax part. The city government has proposed major changes in tax policy as it relates to people’s homes—their most important investment—at a time when the residential real estate market is already under downward pressure due to recent changes in the Federal Tax Code that were specifically designed to target the New York home market.

The proposed changes were conceived in an attempt to lessen a disproportionate burden on low- and moderate-income homeowners that stems from a decidedly convoluted tax system. The current assessment system determines the value of single-family homes based on the market sales of comparable properties, while co-ops and condos are valued based on a theoretical rental value based on rents of comparable rental buildings. This method of valuation, known as the income approach to value, is typically employed by appraisers when they value co-op properties for lending institutions for the purpose of providing an underlying permanent mortgage.

According to Terence Tener, CEO of KTR Real Estate Advisors, a prominent appraisal and consulting firm located in Manhattan, this appraisal methodology produces a “hypothetical” value for the co-op property. This approach, which assumes market rents for the co-op units, will generally result in a very high valuation, which may not necessarily be reflective of the real value of the property.

The Change

The proposed change to valuing properties for assessment would tax co-ops, condos, and rental buildings with fewer than ten units based upon the same criteria as one- to three-family homes, making the sales price the assessed value, and taxing on 100% of market value. Previously, the city used a system of what are known as equalization rates to level out tax burdens more fairly between different types of properties and uses.

Brokers, owners, and others in the industry fear that any additional increase in taxes will further dampen an already depressed and declining market. The cap on SALT deductions coupled with the new limits on mortgage interest deductions resulting from the 2017 Tax and Jobs Act have already depressed housing markets in New York and other similar high-tax states. Apartment prices in New York have already fallen by anywhere from 15 to 40%. (Further reading on this topic can be found at https://cooperator.com/article/nyc-luxury-market-takes-a-dip/full#cut.)

Kathy Braddock, a managing director with William Raveis NYC, a brokerage firm based in Manhattan, suggests that, “the effect of such a change may depend on how the change is made. Will it be retroactive or phased in? That will have an effect on its impact, but any time you’re going to raise people’s taxes, it’s going to have an effect.”

Mark Hakim, an attorney with Schwartz Sladkus Reich Greenberg & Atlas, agrees. “This type of change will likely have a material and adverse effect on values and will stress the financial capabilities of many buildings,” he says. “Yes, some homeowners will benefit, but many others will not. Co-ops and condominiums are not intended to be for-profit organizations; rather, their goals are to maintain their buildings and the services while breaking even, not making a profit. They generally increase the monthly maintenance and assess the shareholders or unit owners only when necessary to maintain a break-even budget and reserves for future repairs. If you have a significant bump, it can cause financial stress to these buildings. Substantially higher carrying costs will mean that values will almost certainly decrease.”

While fairness in tax assessment should be the goal of any taxing authority, no specific group should be targeted to shoulder a disproportionate share. Wealthier homeowners should not be targeted to pay more than their relative share of the overall tax burden. That burden should be fairly portioned, not unfairly shifted.