Jones Lang LaSalle


When It Comes to Taxes, Older Is Better

By JOSH BARBANEL
Published: December 11, 2005

IF you can afford the many millions you need to live at 720 Park Avenue - and you squeak past the co-op board - you will find yourself in a building with all the advantages New York has to offer. It is one of the great old Park Avenue luxury apartment buildings, with tasteful 12-room apartments and neighbors who grace the social pages, the business pages and the lists of the world's richest people.

Top, Frances Roberts for The New York Times; bottom, Chester Higgins/The New York Times
But 720 Park Avenue and its neighboring prewar dowagers, up and down the great streets of the city, enjoy another advantage: they pay uncommonly low property taxes, when compared with the market value of their apartments.

While the owners at 720 Park, which sits on the corner of 70th Street, pay about $40,000 per apartment in taxes each year, an analysis by The New York Times estimated that they would pay two to three times that if they were taxed at their true market values, under the system used for calculating taxes for single-family homes.

The analysis of 68,000 sales by The Times found that this advantage is woven into the tax base of most older co-ops and to a lesser extent many condominiums and postwar co-ops across Manhattan as market values have risen sharply. State law bars assessors from basing taxes for condos and co-ops at their true market value.

Average taxes on Manhattan co-ops and condos are lower than they would be if they were taxed the way some of the most heavily taxed houses are. But it is prewar co-ops that have the greatest tax advantage. On average, they pay significantly lower taxes as a percentage of market value than the taxes paid by even typical one- to three-family homes across the city. And buildings with unusually high recent market values, like 720 Park Avenue, pay unusually low taxes, even when compared to newer condominiums.

The owners of 720 Park Avenue pay about $3.20 for each $1,000 in value, based on estimates of the market value made by The Times from recent sales data.

On 148th Road in Rosedale, Queens, the mostly middle-class owners of boxy two-family homes - nurses, cabdrivers, mechanics and the like - pay more than $9 for each $1,000 in market value. They are among about 44,000 homeowners who pay at or close to the city's top tax rate. "I assumed that they pay more on Park Avenue," said Allyson Davilar, a nurse at North Shore University Hospital who has lived on 148th Road for 11 years. She pays $4,390 in taxes on a two-family house valued at $478,000 last year.

Jacqueline Stewart, a private duty nurse who lives next door, paid $435,000 for her house two years ago. Two weeks ago, Ms. Stewart received a notice raising her taxes by $181, to $4,390. Her husband, Godfrey, who maintains equipment for White Castle restaurants, said he didn't mind paying the taxes if Rosedale received good services, but he had complaints about the schools and what he said was the limited police presence in the neighborhood.

On Park Avenue, co-op owners are often unaware of the details of their tax bills because they pay them through their monthly maintenance charges. John E. Beerbower, a partner in the law firm Cravath, Swaine & Moore and the co-op board president, said the board has no way of knowing whether its building is charged too much or too little in taxes and instead relies on the advice of its managing agent, who in turn hires lawyers who specialize in property taxes.

"Taxes have not been much of an issue or much of a focus," Mr. Beerbower said, compared with repairs and maintenance, "where there are alternatives to discuss, such as whether to get a new rug for the lobby or not."

Under another quirk in the tax law, the owners of older co-ops also pay far less in taxes than do new luxury condos, especially when owners of the new buildings did not qualify for abatements that would cushion the blow of high taxes. Last December, Rupert Murdoch, the chairman of the News Corporation, agreed to pay the highest price ever for a Manhattan residence, $44 million for a triplex at 834 Fifth Avenue previously owned by Laurance S. Rockefeller.

It may have been expensive, but because the apartment was in a prewar co-op completed in 1931, it was a bargain in property taxes. Taxes in the building average $43,400 per apartment, or about $85,600 for Mr. Murdoch's apartment based upon his allocation of shares in the co-op.
In contrast, consider the plight of David Martinez, an international financier, who paid $42.5 million for the 76th floor and part of the 77th floor of the south tower at the Time Warner Center in Columbus Circle. (He later paid $12.5 million for the rest of the 77th floor.) Mr. Martinez has one of the highest individual tax bills in the city, around $395,000 a year for his first purchase, and a total of nearly $546,000 on both, more than six times Mr. Murdoch's tax bill.

This is not to say that in getting favorable tax treatment, the owners of the prewar co-ops are doing anything wrong. They are merely the beneficiaries of a complex property tax system set in motion in 1981 by the State Legislature over the veto of the governor, after the State Court of Appeals threw out the previous tax system as unfair.

The linchpin of the current system was a decision of the Legislature to continue to protect the owners of one-, two-, or three-family homes, who had historically low taxes. For these homeowners rates were set low and increases in assessments because of changes in market values were limited.

As for co-ops and condos, they also got a special break. The law dictated that they be assessed the way rental buildings were, and no higher, even though values of rental buildings were kept low because of rent control and rent stabilization.

Individual homes are reassessed every year using computer models that reflect the latest market values. But when city tax assessors go out to value co-ops and condos, they come up with official fair market values that are a small fraction of the true market values set in transactions between a willing buyer and a willing seller.

They try to find what they call similar rental buildings, and estimate the stream of future rental revenues and rental expenses, and then compute the current value of those hypothetical earnings.

Because prewar co-ops were compared with older rental buildings, with rent regulated tenants, low values were assigned to them. But new condos have higher values: They are assessed initially on their construction costs and later on comparisons with new market rate rental buildings.

According to the most recent Department of Finance tax records, the average official market value for prewar co-ops is stunningly low - $94 a square foot, or about $94,000 for a 1,000-square-foot apartment, values that haven't been seen in most of Manhattan in years. At 720 Park Avenue, the tax assessors assigned a market value of $141 per square foot, or $28.7 million for the entire building. But brokers say that recently, a single apartment in the 14-story building was put up for sale for $20 million and quickly went to contract, at a price estimated at $3,000 a square foot.

Yet 720 Park Avenue, like most large co-ops, routinely challenges its assessment, seeking a reduction from the rates set by the Department of Finance. At the hearings, no one talks about recent sales, or co-op prices per square foot. Instead, the co-op's lawyers point to "comps," or comparisons with nearby rental buildings with arguably lower net rental earnings than those used by the city.

According to records of the New York City Tax Commission, which hears administrative appeals, the co-op board at 720 Park Avenue has appealed its assessment every year since at least 1996. The building won a $1.75 million reduction in the city's market value in 2001, covering several previous years as well. In 2003 and 2004, its official value was reduced by the city assessor, this time by another $1 million, apparently because of weakness in the rental market. But the market value went up by $3.6 million for the tax bills that went out last spring, city records show.

Reed Schneider, general counsel for the Tax Commission, said that explaining the logic behind the assessment of co-ops is difficult. "I explain that, under the law, it is a hypothetical based on a fiction," he said.

Martha E. Stark, the finance commissioner, and other finance officials declined a request for an interview, and referred questions to Sam Miller, an assistant commissioner for communications and public service, who also declined to answer questions. But in an e-mail message, he said, "We are preparing our own analysis, and it will address ways to make the property tax more equitable and transparent."

The analysis by The Times estimated that if 720 Park paid the highest tax rate, as a percentage of market value, charged to single-family homeowners, the co-op would probably have a tax bill of about $117,000 per apartment, or about $9.40 for each $1,000 of market value.

This is just above the rate paid by the homeowners in Rosedale, Queens, whose taxes are high because the 1960's houses were given high assessments when they were built. It is also the rate used when a building is converted to one- to three-family homes.

But most single-family homeowners are allowed to phase in assessment increases over many years - 6 percent a year or 20 percent over five years - and as a result most homeowners pay less than the homeowners in Rosedale do. At the typical assessment of about $6.20 per $1,000 in market value, the co-op would probably owe about $77,000 per apartment or nearly double what they now pay.

This pattern is repeated across Manhattan. On average, all prewar condos pay an effective tax rate of $5.55 per $1,000 in market value, a difference of $2,700 in taxes for each apartment, compared with the top homeowner tax rate. The analysis found that if more recent sales were included in the estimate of market value, the effective tax rate would drop to less than $5 per $1,000 of value in all of Manhattan.

Postwar co-ops in Manhattan pay a higher effective tax rate, $8.50 per $1,000, according to the analysis, while condo owners pay, on average, $9.42 per $1,000, roughly the same as the top single-family taxpayers. (In the suburbs, real tax rates of $20 or more per $1,000 of value are common.)

This pattern is apparent across many city neighborhoods. On prime sections of Fifth Avenue, Park Avenue and Central Park West, the effective tax rate for older co-ops is $5.20 per $1,000 of value - below average for the borough, translating into $10,500 in savings per apartment under the current tax system.

On the Upper West Side, the effective tax rate for prewar co-ops is even lower, $4.80 per $1,000. Even lower effective tax rates were found in newly fashionable neighborhoods, like the Lower East Side and Upper Manhattan, from East Harlem to Hamilton Heights and Washington Heights.

Built into these low tax bills is a special tax abatement created by the Legislature in 1997 to compensate owners of co-ops and condos for what they depicted at the time as the higher tax burden they were forced to bear, compared with single-family homeowners.

The abatement, now scheduled to expire in 2008, cuts taxes a minimum of 17.5 percent for each co-op or condo (but not to owners who have more than three units in any one building) below what they would otherwise be. It is costing the city's treasury $277 million this year, city officials said.

Supporters of the abatement portrayed it at the time as a "crusade for fairness in property taxes," and they say that most buildings still need protection from high taxes, especially outside Manhattan.

But the effectiveness of the co-op and condo abatement has been repeatedly called into question by a series of studies by the Independent Budget Office, a city agency set up to review city budget and policy issues.

In 1998, George Sweeting, an analyst and a deputy director at the office, reported that 19 percent of the abatement money was not well spent, because the abatement reduced taxes below the top level of owners of one- to three-family homes. In 2004, when the law was last renewed, Mr. Sweeting raised his estimate to 35 percent.

Even advocates for co-ops and condos agree that the current tax law and the co-op and condo abatements give an unfair tax advantage to some co-ops. They say they are willing to see taxes on some buildings rise as part of a permanent fix to the tax system that will give co-op and condos equal treatment with homeowners.

"There are co-ops that are still hurting, and the vast majority of them are in the outer boroughs," said Mary Ann Rothman, executive director of the Council of New York Cooperatives and Condominiums.

Martin E. Karp, a retired corporate executive who has led the fight for relief for co-ops and condos since 1990 as head of the Action Committee for Reasonable Real Estate Taxes, said that he only wants equal treatment of owners of single-family homes and apartments, not an advantage.

"Our position is that whatever it is, it will have to be faced up to," he said. "If you want to get equity for 80 or 85 percent of the co-ops and condominiums, the others may have to give something back."

Finance Department officials are considering proposals to make the system fairer, according to several people who have been briefed on the ideas, including a plan that would set the same rules for rental buildings, co-ops and condos, and one-, two- and three-family homes. But similar proposals in the past have been raised and abandoned out of a fear of a backlash from voters who might face higher taxes.

Alexander B. Grannis, a Democratic assemblyman from the East Side who sponsored the abatement measure, said he is also looking for a permanent fix to the city's unwieldy tax system. "It has been easier for mayors and the city to live with the abatement and give up hundreds of millions of dollars in city revenue, rather than finding the political will to fix the entire system," he said.

As for the benefits going to wealthy co-op owners, he wondered whether other taxes, like a higher income tax, might suit the city better. "Property taxes," he said, "are a very regressive way for a government to raise money."