New York City

Why don’t owners of super-luxury apartments pay their fair share of taxes?

There’s a systematic, widespread under-assessment of New York City’s most expensive homes. Forcing the owners to pay their fair share of the city’s property-tax burden seems like a political no-brainer, but here’s why it can’t be fixed without a larger reform.

Luxury apartment buildings on the edge of New York City's Central Park.

Luxury apartment buildings on the edge of New York City's Central Park. Kamira/Shutterstock

In January, hedge fund billionaire Kenneth C. Griffin closed on a $238 million deal for a penthouse at 220 Central Park South, the most expensive home ever sold in the United States. But in the eyes of New York City’s property tax assessors, Griffin’s roughly 24,000-square-foot apartment was valued at a mere $9.4 million. The median effective property tax rate in New York state is 1.6%, and the national median is 1.2%, according to the Lincoln Institute of Land Policy, an urban planning think tank. But the undervaluation of Griffin’s home made his effective tax rate only 0.22%.

The low assessment is not unique to Griffin’s home: all super-luxury condos and co-ops in Manhattan are assessed based on comparisons to neighboring rentals, rather than sales values the way houses are. The result is a systematic, widespread underassessment of New York City’s most expensive homes. “They’re following the law,” George Sweeting, deputy director of the New York City Independent Budget Office, recently told City & State. “The law just gets you to a much lower number than you would if you did sales-based (assessments).”

“The data I’ve seen on New York suggest the inequities in the city are an outlier nationally,” said Adam Langley, associate director of tax policy and data initiatives at the Lincoln Institute. “Typically, with a well-administered property tax system, you’d expect effective tax rates to be pretty uniform within classes of properties,” he said.

The flurry of headlines focused on Griffin’s relatively low tax rate helped stoke public sentiment in favor of the so-called pied-à-terre tax – a levy on second homes in New York City worth more than $5 million – before that proposal died in Albany during this year’s budget negotiations. Imposing a pied-à-terre tax would require being able to accurately assess super-luxury condos and co-ops, and the state’s current inability to do so is part of why the bill didn’t pass.

That would seem to make correcting this dysfunctional status quo all the more urgent. In a city increasingly hampered by its need for infrastructure improvements and its crumbling mass transit system, fixing whatever glitch allows Griffin to enjoy the fruits of a conspicuously low valuation seems like an obvious and politically popular way to generate extra revenue.

Upping the property tax on Griffin’s condo alone to the state median would mean more than $3 million in additional annual tax income, enough to paint a lot of new bike lanes. Extend the treatment down midtown Manhattan’s gleaming, growing Billionaire’s Row and you’ve got some of the capital you need to upgrade subway signals and run more buses and ferries. Since many of the city’s most expensive apartments are sold to out-of-towners – people who don’t vote in local elections – forcing those billionaires to simply account for their fair share of the city’s property tax burden seems like a political no-brainer.

So why can’t it be done? In part because it’s just one of many glaring issues that have developed in the decades since the 1981 adoption of the current assessment system.

State law classifies co-ops and condominiums in buildings with more than three units as Class 2 properties and requires that such residences be taxed at the same rates as comparable rental buildings. In the case of high-end condominium buildings, there are no comparable rental buildings. The city’s website allows that “there is never a perfect match,” but even a cursory look at the examples used for assessments makes clear just how imperfect they are. One of two rental buildings used to evaluate One57 – the 75-story luxury tower completed in 2014 where Dell Technologies CEO Michael Dell reportedly paid over $100 million for its penthouse – is a six-story, 18-unit pre-war building at 65 W. 70th St., where monthly rents for three-bedroom, three-bath apartments top out at $7,000, according to StreetEasy.

The adoption of the 1996 tax abatement program for co-ops and condominiums came with a requirement that lawmakers devise a better plan for assessing such properties. It never materialized. “The idea was, you’d do it for a few years, but you would be moving towards some kind of more comprehensive treatment of co-ops and condos,” Sweeting said. “That plan never appeared.”

Martha Stark, a former New York City Department of Finance commissioner and current policy director for Tax Equity Now NY, said: “It no longer makes sense to value co-ops and condos as if they are rentals. That value bears no relationship to the true market value.”

It’s just one of many wrinkles in the property tax code that exacerbates inequality. In April 2017, Tax Equity Now NY, a broad coalition of homeowners, advocacy groups and real estate interests whose ranks include both the NAACP and The Durst Organization, filed a lawsuit against New York City and New York state, alleging that the system in place discriminates against low-income homeowners and people of color by violating the legal requirement for uniformity of assessments within tax classes. The city moved to dismiss the suit, but weeks before the group was set to make its arguments against that motion in court, New York City Mayor Bill de Blasio and City Council Speaker Corey Johnson announced in May 2018 the formation of a new committee on property tax reform.

“For too long, New York City taxpayers have had to grapple with a property tax system that is too opaque, too complex and just feels unfair,” de Blasio said at the time. “New Yorkers need property tax reform, and this advisory commission will put us on the road to achieve it.”

De Blasio himself has come under fire as a beneficiary of the current system. The mayor and his wife, Chirlane McCray, own a pair of buildings in Park Slope, Brooklyn. The law restricts tax increases on one-, two- and three-unit residences – known as Class 1 buildings – to protect homeowners in gentrifying neighborhoods with rapidly growing property values, a feature that helps keep de Blasio’s tax burden low and creates imbalances among homeowners.

“The current system is rife with inequity, and it’s pitting neighborhoods against each other,” City Councilman Justin Brannan, from Bay Ridge, Brooklyn, said via email. “Even though a property in Park Slope built in 1957 is valued at $1.5 million, its tax burden will be less than a newer built property – say, a property built in 1990 in Bay Ridge that might be valued at $850,000. … The entire system needs a reboot.”

Reclassifying co-ops and condos as Class 1 residences and lifting the cap on Class 1 tax increases would ensure the likes of Griffin and de Blasio pay larger portions of the city’s property tax burden, but it would come with devastating consequences for longtime homeowners in booming neighborhoods. Levying a full, sales-based, market-value tax on, say, senior citizen homeowners in Harlem or Williamsburg – where property values have skyrocketed in the past decade – would likely force many of them from their homes.

But why couldn’t lawmakers pass a narrower reform to force Griffin and his billionaire brethren to pay property taxes more commensurate with their actual property values?

State law both requires uniform assessments within classes and sets limits on how the tax burden is apportioned between classes. Expensive Central Park condos need to be assessed the same way as rental buildings as long as they occupy the same tax class. Moving them to Class 1 or a new fifth class of property would require resetting the class share percentages, which, Sweeting explained, could in turn bring unintended consequences – especially for renters, whose disproportionately large share of the city’s property taxes, counterintuitively, is alleviated by sharing a tax class with industry titans in underassessed condos.

“It’s so complicated,” Sweeting said. “If you move the co-ops and condos out of Class 2, you expose the rental properties to absorbing more and more of the tax burden. Class 2 rentals are the highest-burdened property type in the city system, but they’ve actually benefited from being in the same class as co-ops and condos because the City Council and administration, generally, look to protect co-ops and condos. They look to hold down increases in the burden on Class 2. If you removed the co-ops and condos from the class, I think there’s a concern that protection would no longer hold.”

City and state legislators have taken measures to increase taxes on co-op and condo buyers – especially high-end co-op and condo buyers – outside the enormously complex and politically fraught property tax system. The state budget adopted in April revised the existing transfer and mansion taxes to increase incrementally with higher sale prices, topping out at 3.9% for buyers purchasing homes worth $25 million or more. But those one-time surcharges were added to the budget in place of the pied-à-terre tax that would’ve brought the city steadier revenue from some of its most expensive apartments.

The mayor’s property tax commission, meanwhile, has gone quiet. In a statement to Kings County Politics, commission spokeswoman Marcy Miranda said, “Any recommendations to change the system will be made after thoughtful consideration and careful deliberation. The commission continues to forge ahead with its work and is planning on conducting more outreach across the city.”

Brannan said, “It’s been a year since the commission was empaneled, and so far they haven’t said a thing. We know it’s not going to be easy to untangle the existing system, but we are demanding that the commission’s goal and overriding mission must be to protect Class 1 and Class 2 homeowners who are already being squeezed to death. ... It’s outrageous and needs to be fixed immediately. We need the city and state Legislature to prioritize this and, thus far, that just has not happened.”

Stark believes Tax Equity Now NY’s legal action against the city is the surest and swiftest route to wholesale reform. After all, it was the 1975 lawsuit Hellerstein v. Assessor of Town of Islip that set in motion the legislative action leading to the adoption of the current system in 1981 by declaring fractional assessments of property valuesto be in violation of an 18th century state law calling for full market-value assessments on all properties, ultimately prompting state legislators to repeal that law and establish the classifications that now govern tax rates in New York City and Nassau County. But the current lawsuit stops well short of suggestion any broad solutions.

“Our lawsuit is absolutely agnostic about a solution,” Stark said. “We don’t put forth a solution. What we put forth is that the current system, as it stands, violates the stateconstitution, violates state law and the (federal) Fair Housing Act, and for those reasons should be overturned. Then, our hope is that it forces the political players to come to the table to address what has been deemed not constitutional and unlawful.”

The suit is currently awaiting what Stark described as a “nonsubstantive” delay, as the city appeals a judge’s September 2018 ruling that denied the city’s motion to dismiss the case entirely.

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