This is a pressing issue for at least three reasons. For one thing, the property-tax levy is New York City's single largest source of revenue. The city is leaving money behind by failing to tax the most valuable homes at a rate closer to their market value. Meanwhile, well apart from the ultra-luxury condos, the city is overtaxing apartment buildings, whose renters are struggling the most with affordability. These outcomes go hand in hand. Second, with every new supertall residential tower in Midtown—each one more architecturally dramatic than the last—the effective property tax rates paid by owners on Billionaires Row stand to fall even lower.
While nice condos attract big tax breaks, nice neighborhoods earn long-lasting tax breaks. Finally, one major tax break behind the explosion of ultra-luxury development is up for debate right now: Next month, state lawmakers must decide whether to abandon or renew the controversial a exemption program, which lowers the billable-assessed value of a property to incentivize real-estate development and affordable-housing construction. Arguments for and against a are as philosophical as they are financial. No matter what position the de Blasio administration takes on property-tax breaks in June, it will take more than a tweak in the law to fulfill Bloomberg's vision of redistribution.
As it stands, the smallest sliver of New York's wealthiest homeowners pays the tiniest fraction of New York's property taxes. The combined 89th and 90th floor penthouse at One57 set the new high-water mark for a single-family residence sale in New York. That's an effective property tax rate of 0. That One57 penthouse owner didn't just luck out, either.
Thanks to abatements, phase-ins, and truly systemic undervaluation, the brightest gems in New York City—and arguably, in the world—are being taxed at the same rate as much lesser homes. The gap between billable-assesed value and market-rate value is similar for all 10 of the top condos. Three of which are also to be found in One Place matters for property-tax purposes.
As a report by the Citizens Budget Commission explains, phase-ins and other mechanisms originally designed to prevent property-tax shocks for homeowners are now a source of "intra-class inequities" across neighborhoods. Which means that, with Nordstrom Tower going up just a block from One57 and other supertalls , condo owners on Billionaires Row stand to pay less in property taxes than they would if they owned the same condo in a neighborhood with fewer gee-whiz architectural wonders.
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W hat Bloomberg saw as a way to provide for the welfare of New York looks more like one of the firmest expressions of inequality anywhere. And t hese intra-class inequities are enshrined in state law. There's only so much the de Blasio administration can do about that, but addressing the city's affordability crisis may require him to take a broader stance on property-tax reform.
The formula by which New York assesses property taxes is positively byzantine.
It's easy to see why it's outmoded: Changes in state law in yielded the system that's still in place today. New York law identifies four classes of property for tax purposes. The law fixes the relative share of property taxes that each class pays into municipal coffers—slices of pie whose proportions are more or less fixed. Class 1 properties are residential: mostly small homes. Houses for up to three families, plus some small condominium buildings, are taxed as Class 1 properties.
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Class 1 properties are responsible for most of the market value of New York City properties Class 3 is industrial. Class 4 is commercial. Class 2 is the focus here: Large condo buildings, most co-ops, and large apartment buildings all fall under this category. Calculating taxes for Class 1 properties such as brownstones is fairly simple. For the most part, the billable assessed value is 6 percent of the home's estimated market value. The New York City Department of Finance estimates the property's value by looking at comparable property sales from the prior year.
Determining property taxes for Class 2 properties is way weirder. The city assesses all Class 2 residences as if they were income-generating apartment buildings. Since most condos don't typically generate any income, the city makes up income statements for condominium buildings, whole cloth. The city lists these condo-comparables in this fascinating but incomplete database. Then the city takes 45 percent of the condo-comparable income as the billable assessed value. Finally, the city subtracts any exemptions which reduce the assessed value and abatements which reduce the rate-calculated tax bill.
For two kinds of condos especially, the Class 2 two-step opens up gaping loopholes. The formula simply wasn't designed to anticipate changes in housing more than 30 years after the law was settled. For classic condo buildings, property taxes wind up being distorted by rent control. The disparity between the billable-assessed value and the market-rate value for older condos can be severe.
For stellar condo buildings—a category that has yet to be wholly accounted for in previous literature on Class 2 property-tax inequity—there simply are no rental apartment buildings that compare for tax purposes.
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Look at the tower at W. It may be the skinniest super-tall tower in the world. It's the tallest residential tower in the Western Hemisphere for the time being , and its views are intoxicating.
So far, One57, designed by Christian de Portzamparc, a Pritzker Prize—winning architect, is the first in the line. The answer is unclear. The city's database for condo-comparables doesn't include a listing for the rental building used to draw up the billable-assessed value for One57, or any of the other top-selling condos in the city. The Department of Finance has not answered a request for this information.
Looking back, state lawmakers who passed the bill resetting property taxes for New York couldn't have dreamed of a skyscraper boom almost 35 years later.
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A recent brief from the State University of New York at New Paltz Center for Research, Regional Education, and Outreach shows that, in fact, in the s, lawmakers were almost certainly looking backward. New York City was struggling. Here's that opinion. Propheteer says that lawmakers struggled to reconcile what appeared to be two contradictory standards for condos. One standard prohibited using similar condo sales as a system for assessing value the way the city does for Class 1 homes.
Another standard set a de facto limit on the assessed value of any individual condo unit: The sum of the assessed values of the condos within a building could not exceed the assessed value of the whole building as a single parcel. The overarching sentiment behind property-tax reform in the s was understandable: Homeowners were fleeing New York City, and lawmakers at the city and state level had to do something to stop the bleeding. New York City has since rebounded, of course. And as a result, the property-tax burden has shifted from owners to renters, and from the wealthier to the poorer.
The higher taxes assessed for apartment buildings are passed from landlord to tenant. A system of caps, phase-ins, exemptions, and abatements rewards rising neighborhoods and punishes failing ones. The results look like a chapter from Capital in the Twenty-First Century. A class-action lawsuit filed last year on behalf of renters could bring the whole system crashing down.
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This might be welcome news for most New Yorkers: The inequitable distribution of property taxes is the reason the rent is too damned high. Absent a jarring court decision, though, reform may be harder to come by. Parrott has argued explicitly for re-thinking property taxes for co-ops and condos as a way to address affordability and inequity in New York.
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