The Third Certainty: How and Why New York City s Property Taxes Increase Consistently Addressing The Many Misconceptions

Transcription

1 Real Estate Forefront Emerging Developments in the NYC Marketplace, #22 The Third Certainty: How and Why New York City s Property Taxes Addressing The Many Misconceptions February 2013

2 2 Everyone knows the two certainties in life: death and taxes. In New York City, there is a third certainty which is that real property taxes increase every year regardless of market conditions. In fact, from 2009 to 2011 when the market value of all New York City properties declined, property tax collections increased by 17%. The data shows that since 1995 total billable assessed values have increased every year in every borough with the exception of the Bronx that showed a slight decline in While most would assume that wealthier neighborhoods would be assessed higher taxes, a close look at three neighborhoods shows that there is a wide disparity in property taxes paid within these neighborhoods, and there is no rule as to why some properties are taxed more than others. In short, this report aims to upend the reader s preconceived notions on property taxes. The results of this study suggest that coop buildings do not necessarily have a favorable tax structure over rental buildings in some neighborhoods; townhouses are not always taxed lower than a coop; and the likelihood that property taxes will continue to increase every year is nearly a sure thing. Some of the specifi c fi ndings are as follows: Real property tax collections have increased consistently from 2005 through 2012; however, the increase in tax collections (56%) was in line with the net rate of increase in market values during this seven-year period (51%). Of 111 buildings surveyed for this analysis on the Upper East Side, the Upper West Side and the West Village, coop buildings did not necessarily pay less in property taxes per square foot than rentals, despite the generally held perception that they have been. Real property taxes levied varied widely across and within the three neighborhoods reviewed. Property taxes on single family homes were generally lower on a per-square-foot basis for buildings on the Upper West Side and West Village, but they were higher on the Upper East Side. The overall market value of properties in the outer boroughs increased at a faster rate than in Manhattan from 2003 through 2009; however, the billable assessed values increased more in Manhattan during this period. These and other fi ndings discussed below demonstrate why property taxes generate so much controversy. As per Chairman and CEO Peter Hauspurg, as a former tax lawyer, I am confounded by the City s tax code. Researching these numbers was akin to a Law & Order episode: every new piece of information generated more and more questions. Real property taxes increased over the last fi ve years on an aggregate level for a number of reasons, some more obvious than others. One could argue that, fi rst and foremost, property taxes increased because the City was adding new properties during those years, and as a result, was expanding the tax base. The chart below shows the new housing built in Manhattan alone from 2000 through this year and includes the housing expected through 2015.

3 3 New Units Per Year 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 New Housing Units in Manhattan New Units in Manhattan Cumulative Units ,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Cumulative Units Source: Eastern Consolidated and CoStar As shown in the table below, all of the boroughs saw a signifi cant increase in housing stock, and as a result, an increase in its property tax base. New Housing Units From 2000 To Added Units Percentage Change New York City 3,200,912 3,371, ,150 5% Manhattan 798, ,090 48,946 6% Bronx 490, ,896 21,237 4% Brooklyn 930,866 1,000,293 69,427 7% Queens 817, ,127 17,877 2% Staten Island 163, ,656 12,663 8% Source: Census Bureau Market Values These added properties and expanded base would suggest that the overall market value 1 of New York City properties has increased. The charts below show that, indeed, while the growth in Manhattan looks to dwarf the other boroughs, the outer boroughs actually experienced a much higher rate of market value growth from 2005 through In other words, property values on the existing building stock increased across the City. From 2008 through 2012, however, all four of the outer boroughs saw market values decline while Manhattan s market value increased 22% during that time (brown line). 1 The New York City Department of Finance (DOF) determines the market value of a property using one of three approaches: the sales prices of comparable properties sold that year, the net income based on rent revenue less operating expenses or on the cost to replace that property which is based on construction costs.

4 4 (in millions) $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 New York City Property Market Values By Borough Manhattan Bronx Brooklyn Queens Staten Island Percentage Change Since % 200% 150% 100% 50% 0% Growth in Property Market Values By Borough Manhattan Bronx Brooklyn Queens Staten Island -50% Source: Eastern Consolidated and NYC Department of Finance With its signifi cant offi ce, hotel, retail and wealthy residential base, Manhattan s total market value has generally accounted for 32% of 38% of the overall New York City market value. The chart below, however, shows how New York City s overall market value (yellow line) stayed fl at from 2008 through 2012 largely because of the outer boroughs. New York City Historic Market, Actual And Billable Assessed Property Values NYC Total Property Value (in millions) $180,000 $150,000 $120,000 $90,000 $60,000 $30,000 Taxable Actual Assessed Value Taxable Billable Assessed Value Market Value (right axis) 900, , , , , ,000 0 Source: Eastern Consolidated and NYC Department of Finance

5 5 Assessed Values The chart above clearly shows how assessed values 2 (brown line) increased steadily during these years. More specifi cally, in 2010, the overall market value for New York City properties declined by 1.9% over 2009, but the total assessed 3 value increased by 3.9% that year. In other words, the other reason why property taxes increased most years is because assessed values increased these years. By law 4, the City s Department of Finance (DOF), which is empowered to make property assessments, cannot raise assessed values or property taxes beyond a certain rate per year; therefore, they phase assessed increases over a period of fi ve years. For commercial buildings or residential buildings with 11 or more units, the DOF adjusts the assessment (downward) even further to calculate the transitional assessed value. This transitional value often becomes the billable taxable assessed value 5 on which the tax rate is applied. For residential properties with fewer than 11 units, the tax rate is applied to the actual assessed value. Because transitional assessed values are often lower than actual assessed values, the taxable billable value line (orange) in the chart above is smoother and fl atter than the assessed value line. In short, because these phased-in increases are carried out over five years, billable values increased from 2008 through 2012 even though market values declined. While this stabilization policy eases the tax burden in the frothy years, it adds to the tax burden when property values start to decline which is why the property taxes collected increased from 2008 to The lines below show how taxable values increased for most boroughs when overall market values did not 6. 2 The DOF then determines the assessed value based on a set percentage of market value, called the level of assessment or assessment ratio, which is 6% for Class 1 buildings and 45% for tax classes 2, 3 and 4 as per the DOF website. However, the data below suggests that the assessment ratio can be much lower for Class 1 buildings. 3 The NYC DOF mails property owners a Notice of Property Value (NOPV) once a year that includes information about both the property s market and assessed values which are used to calculate property taxes for that tax year. According to the DOF, assessed values cannot go up by more than a certain rate per year and over a fi ve year period (depending on the building class) unless there was new construction or renovations took place. Therefore, it may take several years for the assessed value to adjust to a large increase in market value. This explains why assessments go up even when market value goes down. 4 Assessed Value (AV) cannot increase more than 6 percent each year or more than 20 percent in fi ve years. Class 2: AV cannot increase more than 8 percent each year or more than 30 percent in fi ve years. 5 Note how from 1993 to 1999, property values changed very little; hence the billable, or transitional values, were the same as the assessed values. But when market values soared, assessed values increased proportionately, but at a far more stable rate. 6 Of the 111 buildings surveyed for the micro analysis, 48, or less than half, showed evidence of increased assessed values in some years when the market value of the property declined. Of these 48 properties, 28 were single family homes.

6 6 Outer Borough Values (in billions) $40 $32 $24 $16 $8 New York City Billable Values By Borough Bronx Brooklyn Queens Staten Island Manhattan (right axis>>) $120 $96 $72 $48 $ Manhattan Values (in billions) Percentage Change Since % 100% 80% 60% 40% 20% 0% Growth In Billable Values By Borough Bronx Brooklyn Queens Staten Island Manhattan -20% Source: Eastern Consolidated and NYC Department of Finance This looks outrageous to the taxpayer, yet a close look at the net increase in market values from to 2012 compared to the net increase in billable values shows that billable value increases have caught up to market value increases for three of the boroughs but not in Manhattan and Brooklyn over this seven-year period as shown in the table below. This suggests that billable values will continue to grow over the next year. Increase In Property Values 2003 To 2012 New York City Manhattan Bronx Brooklyn Queens Staten Island Market Billable Market Billable Market Billable Market Billable Market Billable Market Billable % 21.6% 39.9% 21.8% 56.5% 23.3% 60.0% 21.8% 44.6% 19.9% 43.7% 23.2% % 24.9% 22.0% 28.9% -7.0% 18.6% -4.1% 21.3% -8.5% 16.6% -9.6% 15.2% % 51.8% 70.7% 56.9% 45.6% 46.2% 53.4% 47.7% 32.3% 39.8% 29.9% 41.9% Property Taxes: A Micro Analysis To complement the macro analysis above, we did a micro analysis of property taxes and downloaded property tax data for a sample of 111 Manhattan properties in three neighborhoods: the Upper East Side, the Upper West Side and the West Village. Of these 111 properties surveyed, all but 18 saw property taxes increase every year from 2008 through The average annual rate of increase for the 111 properties surveyed was 5.3%. 7 Shifting the base year to 2003, however, shows that billable market value increases have not caught up to market value increases in New York City.

7 7 Just as the assessment ratio varies according to the four different classes 8 of properties, so too does the tax rate applied. A thorough look at the data shows that these different tax rates and assessment ratios were not necessarily relevant. That is, in order to do an apples-to-apples analysis of property taxes, we felt we should focus on the tax levied per square foot of the property. We also included only pure residential properties with no retail, offi ce or garage. While there were some general conclusions one could draw from this data, there were many exceptions to every rule. The one general fi nding for all the properties surveyed was that property tax collections did not appear to show much correlation to the age of the building, location, size or overall value except for single family homes. In sum, the data suggests that more analysis is needed to explain the wide disparity in taxes collected in these properties. Rental Properties For the 40 rental properties surveyed in the three neighborhoods, property tax collections on the Upper East Side were consistently higher and showed less variation than in the West Village and the Upper West Side. Collections on the Upper West Side were, on average, lower but showed a far greater range. Finally, collections increased consistently every year in all but seven of the 40 buildings surveyed. A few more showed the same tax levied in two subsequent years. Property Tax Collections for Residential Rental Properties West Village /13 317,171 $2,594,993 $8.18 $13.41 $ /12 $2,457,478 $7.75 $12.34 $ /11 $2,006,825 $6.33 $11.38 $ /10 $1,868,683 $5.89 $10.19 $ /09 $1,424,519 $4.49 $8.64 $ Sample includes 13 elevator and walk-up buildings from West 12th to West 13th Street west of Avenue of the Americas Upper East Side /13 169,762 $1,736,084 $10.23 $14.31 $ /12 $1,646,618 $9.70 $15.00 $ /11 $1,493,562 $8.80 $13.55 $ /10 $1,373,850 $8.09 $14.45 $ /09 $1,197,900 $7.06 $13.67 $ Sample includes 13 elevator and walk-up buildings from East 78th Street to East 81st from Fifth Avenue to York Avenue Upper West Side /13 588,870 $3,663,337 $6.22 $13.64 $ /12 $3,371,860 $5.73 $13.64 $ /11 $3,030,587 $5.15 $12.68 $ /10 $2,796,674 $4.75 $11.89 $ /09 $2,455,497 $4.17 $10.08 $ Sample includes 14 elevator and walk-up buildings from West 80th Street to West 85th Street from Central Park West to Riverside Drive 8 Class 1: Includes most residential property of up to three units (family homes and small stores or offi ces with one or two apartments attached), and most condominiums that are not more than three stories. Class 2: Includes all other primary residential property that is not in Class 1 (rentals, cooperatives and condominiums). Class 3: Includes utility property. Class 4: Includes all commercial and industrial properties, and all other properties not included in classes 1, 2 or 3.

8 8 Cooperative Buildings For the 36 cooperative properties surveyed, property tax collections in all three neighborhoods showed much lower variance than for rental properties. Moreover, coop property tax collections were, on average, higher than rental properties in the West Village and the Upper West Side. This contradicts the general assumption that cooperatives receive a favorable treatment over rentals. Collections on coop buildings on the Upper East Side, however, were 8% to 12% lower than rental properties. Unlike rental buildings, collections in the West Village were slightly higher than on the Upper East Side and Upper West Side. Finally, collections increased consistently every year in all but fi ve of the 36 buildings surveyed. A few more showed the same tax levied in two subsequent years. Property Tax Collections For Cooperative Buildings West Village /13 735,352 $6,950,595 $9.45 $10.94 $ /12 $6,711,080 $9.13 $10.70 $ /11 $6,080,222 $8.27 $10.01 $ /10 $5,602,232 $7.62 $9.04 $ /09 $4,892,653 $6.65 $7.71 $ Sample includes 11 elevator and walk-up buildings from West 12th to West 13th Street west of Avenue of the Americas Upper East Side /13 426,529 $3,829,246 $8.98 $10.55 $ /12 $3,681,539 $8.63 $9.75 $ /11 $3,437,368 $8.06 $9.59 $ /10 $3,175,186 $7.44 $9.29 $ /09 $2,770,238 $6.49 $8.20 $ Sample includes 11 elevator and walk-up buildings from East 78th Street to East 81st from Fifth Avenue to York Avenue Upper West Side /13 768,137 $5,455,968 $7.10 $9.35 $ /12 $5,046,138 $6.57 $8.51 $ /11 $4,651,960 $6.06 $7.82 $ /10 $4,400,141 $5.73 $7.50 $ /09 $3,876,874 $5.05 $6.70 $ Sample includes 14 elevator and walk-up buildings from West 80th street to West 85th Street from Central Park West to Riverside Drive Single Family Homes For the 35 single family homes surveyed, property tax collections on the Upper East Side were consistently higher than the West Village and the Upper West Side. Half of these single family homes, however, were close to Fifth Avenue. The single family homes between Madison and Fifth Avenues were 10% lower than those west of Madison Avenue, and taxes went down considerably east of Madison Avenue. Collections on the Upper West Side and West Village were consistently lower, but variability was nearly as high on the West Side as on the East Side.

9 9 Collections increased consistently every year in all but six of the 35 buildings surveyed. Yet the annual rate of increase in taxes collected was much lower on single value homes from 2008 through 2012 than for rentals or coops (see table below). Property Tax Collections For Single Family Homes West Village /13 35,951 $286,453 $7.97 $10.80 $ /12 $281,292 $7.82 $10.19 $ /11 $260,679 $7.25 $9.64 $ /10 $243,932 $6.79 $9.42 $ /09 $220,741 $6.14 $8.43 $ Sample includes 10 elevator and walk-up buildings from West 12th to West 13th Street west of Avenue of the Americas Upper East Side /13 68,189 $822,797 $12.07 $18.18 $ /12 $785,282 $11.52 $17.16 $ /11 $713,576 $10.46 $15.44 $ /10 $683,045 $10.02 $15.07 $ /09 $637,768 $9.35 $14.57 $ Sample includes 12 buildings from East 78th Street to East 81st from Fifth Avenue to York Avenue Upper West Side /13 71,752 $527,855 $7.36 $13.82 $ /12 $498,876 $6.95 $13.81 $ /11 $428,141 $5.97 $12.42 $ /10 $407,060 $5.67 $11.53 $ /09 $404,374 $5.64 $10.19 $ Sample includes 14 from West 76th Street to West 85th Street from Central Park West to Riverside Drive Average Annual Increase In Property Tax Collections ( ) Rental Buildings Cooperative Buildings Single Family Homes West Village 6.9% 6.4% 3.8% Upper East Side 7.4% 2.9% 3.8% Upper West Side 6.3% 6.4% 4.2% Source: Eastern Consolidated, Property Shark and New York City Department of Finance Note in the table above that the increase in tax collections in rental buildings and single family homes was consistent across all three neighborhoods but was lower for Upper East Side coops than for West Village and Upper West Side coops.

10 Conclusion Few topics draw the ire of landlords, coop and condo owners more than property taxes. Because taxes are assessed based on property values, they are often the only downside to a fl ourishing real estate market. And as shown above, because assessments are phased in over a fi ve-year period, they can be an added drain to property owners in a declining market. The analysis above compared property taxes on a per square foot basis to determine if there is a neighborhood or property type that is unfairly overtaxed more than another. The overall conclusion to be drawn is that while property taxes show a wide disparity within a neighborhood and across every property type, the data does not show a consistent distortion in taxes levied. Of course, one major property type condominiums was not included in this analysis because taxes on condominiums are assessed on an individual property basis. Indeed, many very critical reports have been written on the convoluted system by which the City s properties are taxed. This report provided an overview of the situation with samples and charts, but did not attempt to explain the myriad of exemptions, abatements and labyrinthine methodology for tax levies. While the report illustrates how broad the range of tax collections for various properties is, the only conclusion to be drawn from this analysis is that it warrants further research on property taxes looking at differences by building classifi cation, age, borough, etc. But the general assumption in New York City real estate circles that some residential property types are unfairly taxed more than others does not seem to be supported by the analysis above. Many in the real estate industry have argued that the City tax collectors have gotten more and more dependent on real estate taxes over the last few years, but a look at the historic data shows that the ratio of all real estate taxes 9 collected to total taxes collected has varied within a narrow range of 40% to 49%. In 2012, it was 47.5%. 10 Total NYC Taxes Collected (in billions) $50 $40 $30 $20 $10 New York City Tax Collections $25 $20 $15 $10 Total Real Estate-Related Taxes Collected (in billions) 60% 50% 40% 30% Total City Tax Collections $5 Total Taxes Derived from Real Estate Industry* 20% 1994 Real Estate Tax Collections As A % Of Total Tax Collections Source: Eastern Consolidated and NYC Department of Finance 9 Includes property taxes, commercial rent taxes, real property transfer taxes and mortgage recording taxes

11 FOR ADDITIONAL INFORMATION CONTACT: Barbara Byrne Denham Chief Economist Eastern Consolidated 355 Lexington Avenue New York, NY T: F: ABOUT EASTERN CONSOLIDATED Founded in 1981, Eastern Consolidated is one of the country s preeminent full-service real estate investment services firms, combining an unrivaled expertise in the greater New York marketplace with a worldwide roster of institutional and private investor clients. Over the years, it has been responsible for the acquisition, disposition and finance of all types of properties, including office and apartment buildings, lofts, factories, hotels, shopping centers, commercial and residential development sites, taxpayers, parking garages and lots, retail condominiums and air rights transfers. Visit us at Copyright 2011 by Eastern Consolidated. All rights reserved.