NYC Property Tax Reform Would Bring Winners, Losers, and Shocks

If New York City ever overhauls its outdated and labyrinthine property tax system, this could bring greater fairness and better transparency. But some measures could potentially disrupt the local economy and transform the real estate market in ways that take more than a decade to stabilize.

Changes that continue to be snarled in litigation were set out in a 2020 advisory commission report and more recently framed in an Assembly bill that was shelved a few months ago. They would shift the tax burden to thousands of middle- and upper-income residents who generally would be in a better position to leave the city if their housing costs reached a tipping point.

And if they could work remotely, they may find it less expensive to live outside the five boroughs. The shift also could swell taxes for the traditional class of commercial owners that includes the already-rocky office market as well as hotels, retail, industrial, and other nonresidential uses.

The proposed changes focus on the methods used by the city to value, and then tax, some 8.6 million residential owners and tenants to eliminate discriminatory tax impacts affecting low-income people and racial minorities. An underlying cause of failed tax reform initiatives has been the immense challenge of identifying all affected stakeholders.

Figuring out how to soften the blow to avoid an enormous disruption in city real estate values across the board may be equally difficult.

The current tax levy falls more heavily on nonresidential owners and, by extension, their commercial tenants, while residential real estate today receives a significant tax preference. A 2020analysis from a city commission showed that Class 1 properties (generally single family and smaller residential properties) made up 48% of total city real estate value but only 15% of taxes paid. Co-ops and condos were about 23% of value but accounted for only 15% of taxes paid.

If the city council wants to maintain these preferences and shield some residential owners and tenants from abrupt increases stemming from tax reforms, the commercial sector would feel the brunt.

The current reform proposals focus on residential owners and tenants. These primarily are owners of smaller homes in gentrified neighborhoods that have seen significant appreciation in value, as well as condo and co-op owners who have benefited from the city’s longstanding disregard for sales value of units through an approach that imputes a hypothetical rental analysis and often creates lower taxes.

Owners and tenants of offices, hotels, retail and industrial, hold the position of least-favored class in any reform scheme and are likely to feel the brunt of tax increases that are unacceptable in the residential class.

Smaller residential property owners in wealthier areas that have seen greater appreciation in value than poorer neighborhoods have been shielded by caps on taxes that produce many of the tax anomalies familiar to New Yorkers: The owner of a high-value home in an upscale neighborhood may pay less than the owner of a dramatically lower-value home in a poor neighborhood.

The proposed tax reforms would remove the caps, and mechanisms intended to soften the blow wouldn’t apply to thousands of moderate-income homeowners, who would see a sharp rise in their property tax bills.

Condo and co-op owners also would be in the crosshairs as these units no longer would occupy a different class from other residential properties. One dramatic change in the city’s proposed reform would apply market-based sales to value these units instead of the current approach applies a hypothetical rent-based value, which produces a lower property tax bill than a sale approach. Changing to a sale approach without an avenue for assessment relief could place these properties in danger of massive tax spikes.

The current proposals recommend a five-year phase-in period to the residential class, but if a property transfers during the transition, it would be fully phased in following the transfer. This may squelch property sales or reduce purchase prices significantly based on the sudden rise in carrying costs. It also raises a legal question about whether this practice would pass constitutional muster, as it appears to treat properties that sell differently than those that don’t.

The proposals also would remove the fractional assessment approach for all property types. Commercial owners would benefit from a clearer explanation of how this would be implemented. The proposed approach states that these properties would be assessed based on full market value.

Today, New York City applies a fairly arbitrary assessment ratio of 45% to commercial buildings (a building that the city values at $100 million would theoretically be assessed at $45 million). A key trade-off is that the city generally ignores real-world sales both in applying its 45% ratio and in computing its market value.

Relying more on sales data would upend the city’s valuation of many major commercial properties. Removing fractional assessments while maintaining current valuation methods at a minimum requires far greater clarification. Commercial owners should be concerned that tax reform, as described, leaves much room for speculation, potentially removing several bedrock variables from the formula.

To the extent the more detailed changes to residential properties would produce politically unpalatable outcomes, city council intervention likely would target commercial owners to make up the difference in the tax levy.

Mayor Eric Adams and city leaders have their work cut out to ensure that producing a more equitable tax system doesn’t have unintended consequences of economically discouraging many residents, commercial owners, and their tenants from staying.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David C. Wilkes is property tax and valuation strategy partner in Cullen and Dykman’s corporate department.

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