Are you familiar with Ernest Robinson and Rosa Rodriguez? If not, you should be. They, while much lesser known, may turn out to be more powerful than many commercial real estate billionaires who have been trying to do something that Mr. Robinson and Ms. Rodriguez may be on the verge of doing—or causing to be done anyway.
Mr. Robinson and Ms. Rodriguez are the plaintiffs in a class action lawsuit asserting that discrimination against black and Hispanic renters is being promoted by the underpinnings of New York City’s and New York State’s real estate tax system. The issue of race, by alleging discrimination, is one which will force serious attention on this issue. For decades, rich (and mostly white) property owners and their lobbyists have tried in vain to promote a system in which real estate taxes were levied in an equitable fashion.
At the root of the problem are, you guessed it, elected officials who, for a generation, have realized that there are more homeowners who vote than commercial income-producing property owners who vote. But this calculus will change significantly if tenants began to understand that their rents are being driven up by an unfair tax system.
From a real estate tax perspective, there are four classes of properties. Class One is primarily one, two- and three-family homes. Class Two also encompasses residential properties and is divided into three segments: condos, co-ops and buildings with more than 11 residential units. Class Three properties are utility properties, and Class 4 are commercial properties such as retail, offices and hotels.
Classes Two and Four have historically been asked to pay disproportionately more than Class One and by a wide margin. And Class One is where all of those valuable voters reside. These properties make up 73 percent of all parcels in the city, aggregate to 46 percent of all property value in the city and pay only about 15 percent of the total real estate tax burden. To balance this out, all other properties (mostly income-producing ones) must pay a disproportionally high tax burden. For instance, office buildings account for 27 percent of total property value in the city, yet pay a whopping 42 percent of the total tax burden.
Larger apartment buildings in Class Two also pay significantly more than their proportional share of total value dictates they should be paying. After all, is it fair that a $45 million townhouse, or a $45 million co-op apartment on Fifth Avenue, pays $2 per square foot in real estate tax, while a $45 million apartment building pays $22 per square foot?
The lawsuit, filed by the boutique firm Newman Ferrara, claims that within Class Two, the mostly minority renters in these buildings are paying inflated market rents to support the increasing property tax burden. While a great number of these units remain under rent regulation, the number of “preferential” leases is growing, and while still technically regulated, these units are actually at market rents.
The suit goes on to say, “As currently applied, New York City’s property tax classification system has … a disparate and adverse impact upon the city’s African-American and Hispanic residents and denies such residents their statutorily and constitutionally protected rights to due process and equal protection.” This litigation claims that the system unfairly targets minority tenants.
The tenants in Class Two properties are getting slammed in two ways. The first is simply by the fact that rent regulation artificially constrains the supply of available units, which drives the rents up. Studies at Wharton and MIT have concluded that market rents would be lower without rent regulation. The second is caused by this unfair real estate tax policy, which has tenants in these properties paying rents from which about 30 cents of every dollar are going toward taxes.
The assertions made in this lawsuit are supported by a 2013 report by New York University’s Furman Center for Real Estate and Urban Policy that concluded that the city’s tax policy negatively affects black and Hispanic tenants. A report from the Citizens Budget Commission substantiated the findings of the Furman Center and the inequitable nature of our tax system. It would appear the case for the plaintiffs is strong.
Now, because of the nature of this class action suit, this issue of dealing with an inequitable tax burden will very likely have to be addressed. If the suit is successful, the entire tax system would need to be reformed. This is one that we will be watching very closely, as will our entire industry.