Last week, Massey Knakal hosted its annual Multi-Family Summit at the McGraw-Hill Conference Center in midtown. The crowd of over 700 attendees had an opportunity to hear perspectives from dozens of speakers, including many of the top participants in this market segment in New York City.
Throughout the day, speakers discussed various topics such as the volume of apartment building sales, value trends, rent regulations, operating best practices and the status of debt markets. It is clear that the multifamily market in the city is gaining positive traction as the dollar volume of sales is increasing as well as the number of properties sold. Cap rates are compressing, financing is plentiful and voracious demand significantly outpaces the supply of available properties for sale.
Generally, the speakers were very optimistic about the short-term and medium-term prognoses for this market segment. The one theme that always entered the conversation when “concerns about the future” were discussed was the impact steadily increasing real estate taxes are having on operating performance. While real estate taxes are supposed to reflect a relationship to market value, it appears this relationship has deviated along the way as the city seeks to keep tax practices rigged such that revenue continues to pour in, regardless of market conditions.
The calculation of real estate taxes is sometimes perplexing to some property owners. A politician makes a campaign pledge that real estate taxes will not be increased and then says the campaign pledge was fulfilled and “real estate taxes will remain unchanged this year.” Then, an owner gets their tax bill and the amount on the invoice is much higher than the prior year. What has happened here? Let’s take a look at how real estate taxes are calculated.
There are two components that make up the real estate tax calculation. The first is the real estate tax assessment. This number is supposed to bear some relationship to the market value of the subject property and is typically a percentage of that value (there are other aspects of assessments like a “target assessment” and a “transitional assessment,” but for the purposes of this discussion we will assume there is an assessment upon which taxes are based). The other component is the tax rate, and there are different rates for different classes of properties. The tax assessment is multiplied by the tax rate to come up with the amount of tax that is due each year.
When politicians say they are going to support a platform of “no real estate tax increases,” they are typically speaking about the tax rate alone. Even when the rate stays flat, if the assessment rises, an owner’s tax bill is going to increase. From the owner’s perspective, they really don’t care if the rate goes up or down, or if the assessment goes up or down. All they really care about is how much they have to pay each year.
When I used the word “rigged” in the second paragraph, I was referring to practices implemented in the city that keep tax revenues rising. For instance, let’s use the early 1990s as an example. Throughout the 1980s, the city had a policy of reassessing properties at 45 percent of their selling prices. The difference between this new target assessment and the current assessment was phased in equally over a five-year period. To the extent that a property may have been sold multiple times within a five-year period, or other reassessments had been made, there may have been several of these assessment “clocks” in motion concurrently.