Tax imbalance subject of BOMA luncheon - Building Owners' and Managers Association of Greater New York Inc

Real Estate Weekly, June 17, 1992

The double-edged sword of New York City real estate taxes -- the largest single source of city revenue and the only tax it controls directly -- took center stage at The Building Owners' and Managers' Association of Greater New York, Inc. luncheon at the Waldorf-Astoria Hotel.

Tackling this thorny issue was speaker Gary Schuller of Podell, Rothman, Schechter & Banfield, a Manhattan-based law firm specializing in tax certiorari proceedings and tax abatements/exemptions.

He warned owners and managers that the inequity of the tax classification system, which places a preponderantly heavier burden on commercial property owners (Class IV), than the politically correct single-family homeowners (Class I), will "seriously undermine the long-term economic recovery of our City if it is not addressed. Taxes on prime office space are now at $10 per square foot in many buildings and will prove to be a further disincentive for companies to remain in Manhattan," Schuller said, "if action is not taken to allocate real property taxes more rationally."

To understand how serious the situation is, Schuller traced the steps that put the city in its current position. * The City historically ignored the state law requiring property be assessed at full value for, tax purposes * lt not only assessed property at a fraction of its value, but applied a much lower fraction in assessing one- to three-family homes * Over time, this practice caused a "de facto" system of classified taxes to arise that placed a far greater share of the annual tax levy on commercial property * After this practice was declared illegal, in 1982 a classification, or "share-of-the-pie" system was enacted, with each of four classes being apportioned taxes according to their class share as reflected on the City's 1981 assessment roll * Classification effectively institutionalized the "de facto" system, and was intended to preserve the class shares at the same relative level as 1981-82. * However, the system was not permitted to operate as intended. The City Council continued to use its discretionary authority to extend favored treatment of small homeowners in the 1980's, shifting the burden from Class I to Class IV. At the same time, state-mandated adjustments, which were designed as a check on the Council's action, were repeatedly postponed, and the discrepancy in the shares mounted.

The combined effect was "devastating," Schuller said. "The system, as it is practiced, has caused the tax load on commercial owners to grow significantly, while Class I tax contributions have continued to shrink." The full impact was felt in 1989, "as every commercial owner knows," he added. Adjustments being considered then would have increased Class I taxes by 30 percent, a result considered politically untenable. The law was amended to change the base year for future class shares from 1981-82 to 1989-90. Thus, rather than preserve the 1981 shares, the first decade of classification has witnessed a further shift of property taxes onto the commercial class. Indeed, Schuller noted that between 1982 and 1991, the commercial share 1982 and 1991, the commercial share of property taxes rose by over 25 percent.

Schuller also discussed a second aspect of the City's property tax system -- transition assessments. This is the requirement that changes in a property's assessment be phased in over five years. "While in concept a good idea, in practice this feature of the law has been detrimental to owners in the current market," he said.

He explained that the city, in fixing assessments on "sold" properties, made no analysis to determine if the mid-1980's 1980'boom prices represented true market value, and a "predictable phenomenon emerged," Schuller said. "There was a growing tax disparity on new sales versus those properties which had not changed hands. To close the gap, the City increased assessment on properties which had not been sold." But because those increases were not immediately taxed in full, the spread between actual and transition assessments in Class IV grew, reaching an astronomical $10 billion in 1990. "In other words, no matter what happened to values in 1991, there was still $10 billion in past, untaxed assessment increases waiting to be phased onto the city's tax roll".