Governor Paterson has a gift for Mayor Bloomberg in his proposed budget: more than $50 million a year from the under-tapped resource that is the city’s co-op housing market.
In the governor’s cross hairs are loans for co-ops, which have long been free of taxation while taxes on equivalent condos and houses run between 2.05 percent and 2.175 percent of any mortgage. The budget seeks to allow the city to slap this mortgage recording tax onto co-ops, swinging the tax lasso around a cash source that has been eyed-but untouched-by city officials since at least the days of Ed Koch.
The tax would mark another step in the assimilation of the co-op, an outlier housing type that was once beyond the reaches of many housing rules and laws, and it would bring in, by the mayor’s count, at least $50 million annually in revenue for the city.
For the Paterson administration, the current lack of a co-op mortgage tax is merely a “loophole” in need of closing. “Ultimately, this is an issue of equity and tax fairness,” said Matt Anderson, a spokesman for the state’s Division of the Budget. “Financing statements for co-ops are functionally equivalent to traditional residential mortgages, but because of a loophole in the current system, they are not subject to mortgage recording taxes.”
Needless to say, co-op owners aren’t thrilled. “Obviously, we’re very unhappy with it,” said Arthur Weinstein, a co-op attorney and the vice chairman of the Council of New York Cooperatives and Condominiums. “In effect, it reduces the value of every co-op in New York City.”
Recording taxes do not currently apply to co-op mortgages because they are, in actuality, not mortgages at all. Officially, a co-op buyer purchases shares in a corporation that owns a building, not a specific piece of real estate. Thus, a buyer cannot get a mortgage on property, but rather a loan backed by shares of the building.
Those in the co-op world say a new tax will upset the market for co-ops, which the recession has already rendered fragile. They also contend that the tax, as proposed, appears to apply to all refinancing as well as new loans, potentially placing a fresh burden on existing owners who aren’t even looking to sell.
Prices on co-ops have indeed slipped recently, with average Manhattan sales prices more than 16 percent lower at the end of 2009 than they were in early 2008, according to appraisal firm Miller Samuel. A new tax-amounting to $13,000 for a $600,000 mortgage, for instance-would clearly be unwelcome for a would-be buyer, likely depressing prices as the added costs are factored in.
BUT EVEN AS THE co-op lobby is displeased with the governor’s proposal, it’s not clear that the industry is up for a battle with the Paterson administration.
“We’re opposed to it-let’s put it at that,” said Marc Luxemburg, president of the co-op council. “The problem is, you have a huge budget deficit, and they’re looking around for any source of money they can find. Collectively, we’d have to reduce the size of government, which doesn’t look like it’s going to happen too quickly, or they’ve got to dig deeper into the taxpayers’ pockets.”
Either way, new taxes are never good for politicians’ popularity, but, for whatever reason, Governor Paterson seems willing to step up to the plate against the Manhattan-concentrated co-op constituency. (About 43 percent of the city’s non-rental housing is co-op, according to city figures, with a preponderance in Manhattan in particular.)
And what’s unusual is that the governor is offering to absorb this political punch without any direct benefit to the revenue-starved state budget, with the beneficiary instead being Mr. Bloomberg, who himself is trying to balance a budget.
Based on the way mortgage recording taxes are structured, the bulk of the revenues would go straight to the city. (The M.T.A. would see a smaller benefit, as would the state mortgage agency.) The Bloomberg administration says it did not lobby for the effort; it has not made any noticeable push for this co-op tax in the past.
Still, the mayor warmly accepted the proposed offer from Mr. Paterson, testifying at a budget hearing in Albany in late January that it was “good news” for the city.
In large part, the gesture from the governor seems one meant to cushion the blow from his proposed budget, which would cut aid to New York City by $1.3 billion.
The governor’s budget refers to the effort as part of its “mandate relief package,” meant to lighten the load for New York City and other local governments.
Regardless of who is pushing it, the tax has certainly been eyed for quite a while, as co-ops have gradually been morphing into something more closely resembling a typical condo, straying further from their unique semi-socialistic place in the city’s housing world. Transfer taxes were extended to co-op sales in 1989, over the cries of co-op owners. At the same time, the Koch administration sought to collect the mortgage recording taxes, a concept that eventually was shelved. (A few years ago, too, co-op deal prices joined those of condos and houses as part of the public record.)
Twenty years later, the recording tax idea has now been dusted off. Should the Legislature indeed approve the measure, the Bloomberg administration would need to implement it, and according to a mayoral spokesman, the city would seek to do just that.