Throughout the ’80s, when values were increasing every year, the city was very happy as real estate tax revenue continued to climb each year and this process of reassessment was thought to be wonderful. However, when the savings and loan crisis hit in the early 1990s, values began to fall sharply and properties were selling for a fraction of what they were selling for years before. Had the city kept the same assessment practices in place, real estate assessments would have fallen dramatically as would have real estate tax revenue. Seeing the writing on the wall, this system of reassessment was suddenly not so wonderful and was abandoned to ensure that real estate tax revenues would continue to flow.
Manipulations like this have continued to exert upward pressure on the amount of real estate tax each property pays and these burdens continue to escalate. During the recent recession, New York City saw its average property value drop by 38 percent from peak-to-trough over a three-year period (2007-2010) yet tax assessments continued to climb during this period and continue to climb today. If taxes are supposed to bear a relationship to market value, something is amiss. But maybe intentionally so.
Presently, New York City generates about 50 percent of its revenue from the real estate industry. Between real estate taxes, water and sewer charges, mortgage recording taxes, and transfer taxes the real estate industry is critical to the economic health of the city.
There are two primary objections that owners have when it comes to real estate tax burdens. The first is that taxes are disproportionately skewed toward commercial and multifamily properties to the benefit of single-family homes and cooperative apartments. The second is that the actual amount of taxes paid is simply too high, leading to an uncompetitive dynamic relative to other locations.
The tax burden faced by office-building owners have been steadily climbing. Today, in an office building, real estate taxes can be as high as $25 or $30 per square foot. When operating costs of $10 to $15 per square foot are added to this amount, some building would need to achieve rents of nearly $50 per square foot just to break even and this is before even a single dollar of debt service is taken into consideration. According to Mary Ann Tighe, CEO of the tristate region at CBRE, the average asking rent in midtown is currently $61.49 per square foot. This leaves little room for mortgage payments or profit.
On the residential side, rental apartment buildings also pay a very high amount of real estate taxes per square foot. Taxes per square foot are expected to be high in New York City as rents per square foot are the highest in the country. What is more of a concern, however, is that taxes as a percentage of revenue are ballooning. In multifamily buildings today, real estate taxes can be as much as 30 percent of revenue. This means that if a monthly rent for an apartment is $3,350, that tenant is paying over $1,000 in real estate taxes.
These percentages make New York City real estate less competitive with other markets as our 30 percent ratio is by far the highest in the nation. In fact, it is nearly double the burden faced in Boston which comes in a distant second.
In condominium buildings, similar to multifamily rental buildings, real estate taxes can be as high as $20 to $25 per square foot. What drives some owners crazy is that real estate taxes on cooperative apartments can be only a few dollars per square foot even though their market values may be similar to those of comparable condominium units. This makes absolutely no sense and politics have more to do with this dynamic than any reasonable empirical formula.
Similarly, single-family home taxes per square foot are miniscule but getting taxes on some sort of parity with other properties is politically very difficult. Creating awareness among those who pay the disproportionately high taxes would make the political hurdles lower and increase the likelihood that tax parity could become a reality. However, no one is holding their breath at the moment.
In multifamily properties, real estate taxes have risen at rates much higher than rent-regulated increases that have been granted, and at a much higher percentage than market rate rents have increased, leading to an increasingly lower bottom line, as a percentage of revenue, for owners each year. This relationship is unsustainable and will eventually cause a disruption in the marketplace. For this reason, many believe that, decades from now, there will be perhaps only a few elevator rental buildings left in Manhattan, as the excessive cost to operate theses properties will force owners to pass these expenses along to residents. The only way to effectively do this will be to convert properties to cooperative or condominium ownership. This would cause further supply constraint in the market for those looking for rental housing.
Given the importance of real estate taxes and related charges to the local economy, it is not reasonable to expect the cumulative burden to be reduced. However, a more equitable sharing of the burden should be implemented.
Additionally, the distinction between the city’s perspective of real-estate-tax-revenue-per-tax-lot versus the industry’s perspective of real-estate-taxes-per-square-foot provides a tremendous opportunity to forge simple, mutually beneficial policies. This would be in the long-term best interest of both.
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and in his career has brokered the sale of more than 1,175 properties, having a market value in excess of $7.8 billion.