The mayor announced today that he plans to push for a property tax increase of 7 percent. Adding insult to injury, many New Yorkers may be in for an even nastier surprise come tax time.
Because the city often relies on year-old income data to assess property taxes, many property owners — from the landlords of large commercial buildings to individual cooperative and condominium unit dwellers — could discover that their assessments have increased despite a recent decline in property values, according to Joseph Giminaro, co-manager of Stroock & Stroock & Lavan’s tax certiorari group.
The city raises property taxes in two ways, he explained: increasing tax rates, which Mayor Michael Bloomberg’s plan would affect, and increasing assessments. Property is assessed at a percentage of its market value, Giminaro said, but the value is not determined through sales price, but through data on income and expenses. Residential buildings are based on potential rental value, while commercial buildings are assessed based on rental income. To determine income levels, the city often relies on data that is a year or more old, Giminaro said, since current data isn’t yet complete in time for the January 15 assessments.
When the real estate market is on the rise, that formula can work to the owner’s advantage. But this year, the city will create its assessments based on data from 2007 — when New York City was at the peak of its housing boom. As a result, the recent drop in sales prices and rents will not necessarily result in a drop in tax assessments.
“There’s a year-long lag in that data,” Giminaro said. “People may think that because sales prices have come down, assessments will go down. Instead, [they] may go up because rental values in 2007 were very strong. They may get a shock when they see their new assessment.”
This year alone, the averages sales price of a Manhattan apartment decreased 11.3 percent in the third quarter to $1.48 million, from $1.66 million in the prior quarter, according to appraisal firm Miller Samuel. Average rents, meanwhile, fell in Manhattan by as much as 7 percent between October 2007 and October 2008 according to data from The Real Estate Group New York.
The problem could be particularly damaging for commercial landlords experiencing sudden vacancies that their assessments don’t take into account.
“If I’m a commercial building that is tenanted by one of these financial institutions, I may have floors of my building that are now going to be vacant,” Giminaro said. “I may have a crisis the city doesn’t know about.”
In the wake of the recent financial crisis, the office vacancy rate in Manhattan climbed to 7.4 percent in the third quarter, up from 5.7 percent a year ago, according to Cushman & Wakefield.
When property owners appeal their assessments, Giminaro said, they can use more recent data.
In a reversal of his position earlier this year, Bloomberg said at today’s press conference that he will encourage the City Council to rescind a 7 percent property tax reduction made last year. The measure would generate $576 million in additional revenue for the city, Bloomberg said, in an attempt to close a $4 billion budget shortfall for the fiscal years 2009 and 2010.
The annualized residential tax rate for condo and co-op buildings with four or more units is 12.139 percent for the 2008-2009 fiscal year, and could rise to roughly 12.989 percent the following year, Giminaro said. The commercial rate is 9.87 percent, and could climb to approximately 10.56 percent.
Bloomberg’s proposal calls for the city to no longer issue the popular $400 property tax rebates that have been in place since 2004. The cut would generate $256 million in additional revenue, he said.
Steven Spinola, president of the Real Estate Board of New York, said he supported the mayor’s plan to remove the tax rebate, but said more property taxes could harm the city’s economy and the real estate industry.
“We’re not happy about a real estate tax increase,” he said. “It’s going to slow down the recovery because it takes money out of the private sector. We think it’s a mistake.”