While these figures are difficult enough to comprehend under current market conditions, what is more perplexing is that during the recent downturn, in which we saw average prices per square foot for Class 2 and 4 properties drop from peak levels in 2007 through 2010 by about 38 percent, assessed values continued to increase. According to a REBNY report, from 2008 to 2012, the city’s estimate of market value increased by 3.46 percent and assessed values increased by 26.4 percent.
While I could take up several pages of The Commercial Observer with examples of simply crazy assessment increases, I will use just one to illustrate what is happening.
The 49-unit apartment building at 315 West 115th Street changed hands about a year ago. Since the sale, no regulated units were deregulated, so the income has not changed much. The present owners are renovating a few of the vacant units, but no significant major capital improvements were completed. The assessed value here nearly tripled in the 2012 tentative assessment roll from $422,550 last year, up to $1,233,900. How can such an increase be explained when essentially nothing has changed at this property? This is just one example amid thousands that just don’t make sense.
These unfathomable numbers have left a dynamic in which real estate taxes are constantly rising as a percentage of gross revenue.
When I mention that valuation methodology is manipulated by the city, remember that in the 1980s, Class 2 and 4 properties were reassessed upon sale at 45 percent of the sale price, and the difference between the resultant number and the old assessment was phased in equally over a five-year period.
This left some properties with multiple assessment “clocks” running at any particular time, making it very challenging to project where taxes were headed. The city loved this method during the mid-to-late 1980s, when values were increasing annually. However, as soon as values started to decline after the savings-and-loan crisis in the early 1990s, assessed values were dropping too rapidly and the city abandoned their previously beloved methodology. Assessed values were then going to be determined based upon income and expenses and value trends within neighborhoods. This shift was clearly implemented to keep real estate tax revenue from dropping too sharply.
IN ADDITION TO these meandering assessed value calculations, we mentioned that tax rates were also subject to manipulation. When we hear elected officials proclaim that “real estate taxes will not go up,” they are commonly referring to the tax rate itself. If a rate was 10.5 percent one year, and remained 10.5 percent the next year, politicians cheer that “taxes did not go up.” However, a property owner’s tax bill is sure to increase as the assessed value rises. As I stated before, the amount of the check written to pay real estate taxes is all that an owner is really concerned about.
Interestingly, if we look at historical tax rates, we generally see more rapid increases when times are tough than when times are good. While this is counterintuitive, it is not surprising as municipal tax revenues slide during recessionary periods and real estate taxes are a way to help bridge the gap. From 1981 through 1991, tax rates among all classes of properties remained consistently between 9 and 10 percent. In 1992, during the height of the S&L crisis, rates increased about 10 percent to about 11 percent.
Tax rates remained fairly steady throughout the balance of the 1990s and early 2000s. During the 9/11-and-dot-com-led recession in the early 2000s, tax rates jumped significantly. From fiscal years 2002 to 2004, Class 1 tax rates increased from 11.609 to 14.550, a 25.3 percent increase; Class 2 rates increased from 10.792 to 12.620, a 16.9 percent increase; and Class 4 rates climbed from 9.712 to 11.431, a 17.7 percent rise.
If we analyze tax rates during our most recent recession, we see that tax rates have jumped again. From 2008 to 2011, Class 1 rates are up 12.5 percent, moving from 15.434 to 17.364; Class 2 rates have climbed 13.5 percent, from 11.928 to 13.535; and Class 4 rates increased 2.5 percent, going from 10.059 to 10.312. To pound property owners at times when they are being slammed by broader economic conditions is a one-two punch that can be demoralizing.
If we compound the tax assessment increases we have seen with these tax rate increases, we see that today’s real estate tax burdens are disproportionately eating up gross revenue at higher percentages than ever before. This dynamic is taking a toll on investors and operators. It will be interesting to see if the governor’s tax-cap pledge will be implemented and, if so, whether it was meant to simply cap the tax rate, or the amount of the check property owners have to write to the city.
Owners have the ability to fight their tentative assessments. Owners of Class 1 properties who wish to file an appeal must do so by March 15. Owners of all other property types must file by March 1. The final assessment roll will be published on May 25. In June, the Finance Department will use this final roll to calculate property tax obligations for fiscal year 2012, beginning July 1.
Fiscally, there is much optimism today, as Governor Cuomo appears to be resolute in his quest to cut government spending as the way of addressing the state’s budget woes. The mayor also seems to be on board with this approach, and the importance of a successful implementation of this route cannot be overstated. To the extent they are unsuccessful, there is no doubt that additional real estate tax increases will be right around the corner.
rknakal@masseyknakal.com
Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,125 properties, having a market value in excess of $7 billion.
