Luxe condo owners benefit from city’s flawed property-valuation process

Wealthy condo owners benefit from New York City’s flawed property-valuation process, in which officials use arbitrary calculations and shift the majority of tax burdens to lower-priced properties and rentals, according to a new Bloomberg News investigation.

Authorities have blamed imbalances in tax bills on Section 581 of the New York Real Property Tax Law, which has been interpreted to mean that assessors determine taxable value based on the hypothetical incomes co-ops and condos would generate. Since they don’t, the values create a hypothetical guessing game and ample room for variation.

Assessors use comparables for determining hypothetical incomes, but they all appear to use different values to determine the number. For some buildings, the income number was changed hundreds of times for different comparisons, skewing the capitalization rate, which is determined by dividing net income from a property’s market value.

Officials appear to be reducing taxable values on expensive condos by increasing capitalization rate to be much higher than what the real market dictates, leading to lower property values than the market suggests and a bigger tax break. For less expensive condos, assessed values are more true to market value, diminishing any tax benefit.

City officials wouldn’t reveal much to Bloomberg about how the capitalization rate was determined, but did find that an estimated effective tax rate of at least 5 percent is added onto the cap rate to account for a prior year’s tax payments, grossly overstating the estimate.

Bloomberg reports that taxable value on tens of thousands of condos has decreased by an average of about 80 percent due to the flaws in the property-valuation process.

One study reviewed by Bloomberg shows that annual property taxes shifted about $292 million from the top 10 percent to the lower 90 percent in New York. Another study showed an even greater shift of approximately $450 million.

Bloomberg cited 163 cases, based on sales and tax records for 2017 through 2019, where the assessment of an entire condo building came in at less than the sales price of a unit within the building, highlighting the flaws in the assessment system.

Mayor Bill de Blasio three years ago announced a panel to review and overhaul the system. In February, de Blasio pledged to revive the administration’s initiatives concerning property tax reform and cited a delay of the preliminary report on the pandemic.

Amid the sluggish turn towards confronting the inequality, Tax Equity Now New York, a local tax reform group, in a May letter asked the Department of Justice to challenge the city’s tax structure under the Fair Housing Act.

The Real Deal previously reported the TENNY policy director Martha Stark cited the department’s challenge of Nassau County property tax laws on the basis that higher rates in Black and Latino neighborhoods violated the act.

In the letter, Stark argued residents of color are taxed at higher rates through a “dizzying array of valuation methods, caps, adjustments, abatements, and other features.”

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[Bloomberg] — Holden Walter-Warner