By Stuart Saft, Holland & Knight LLP
In March, 2024, New York State’s highest court, the New York State Court of Appeals, revived Tax Equity Now New York’s eight-year-old lawsuit seeking to force the City of New York to fix what TENNY described as an inequitable property tax system. TENNY’S lawsuit challenged the way New York City’s property taxes are assessed, as being discriminatory. Last week TENNY filed a motion for summary judgment in its lawsuit against the City, asking the Court of Appeals to force the City to change how it assesses co-ops, condos and one, two and three-family homes. However, TENNY has never explained how that is to be accomplished or how tenants whose rents are regulated are hurt by the current system.
The Court revived claims brought by TENNY holding that the City’s tax system violates the federal Fair Housing Act because it disproportionately burdens communities of color. The opinion stated that TENNY’s lawsuit sufficiently argued that the tax system is “unfair, inequitable and has a discriminatory disparate impact on certain protected classes” resulting in rental buildings being taxed at a higher rate than condos and co-ops, with the added cost being passed on to renters. How is that possible when regulated renters do not pay property taxes and their rents would not be lower if co-ops and condos paid more because only the landlords would benefit. Notwithstanding what TENNY claims, communities of color would not benefit from TENNY pushing this case. Moreover, the communities of color who own co-ops and condominiums would be significantly adversely affected.
Significantly, neither the Legislature, the Court nor TENNY ever explained why co-ops and condos should be in Class 2 with rental buildings rather than in Class 1 with other owner-occupied housing. This is the issue no one ever addresses: why are co-ops and condos, which are owner-occupied housing, not in Class 1 with the other owner-occupied housing, including 1-3 family houses? What is the basis for the comparison between rental buildings and owner-occupied housing that is the basis of TENNY’s position?
The Court failed to explain how communities of color are overly taxed when rental tenants do not pay taxes on their regulated apartments and the rents are subject to the various rental laws. It also failed to address the fairness of a system in which owners of 1-3 family houses pay a tax that is two-thirds to three-quarters less than a co-op or condo having an equivalent value. This is correct. Regardless of where the owner-occupied housing is located, the owner of a house having the same market value as a co-op apartment or condo unit pays real estate taxes that are approximately 25% of the taxes paid by the owner of a similarly priced co-ops or condos unit. The Court’s mistake was equating the co-ops and condos with rental buildings rather than 1-3 family houses. Regardless of what TENNY demands, only the Legislature can fix this problem.
Moreover, TENNY ignored how the City would tax the owners of co-ops and condo apartments, since the share of the co-op or the condo each owner has is not based on comparable value, but size and location. The big question that the Court left unaddressed is what method would the assessors utilize in determining the Fair Market Value of co-op apartments and condo units and therefore the taxes paid by co-op and condo owners? Unlike rental buildings having a single owner, co-op and condo buildings have multiple owners, whose interests in the building are not based on the Fair Market Value of the units or apartments in comparison to the other units or apartments; because their share is based primarily on comparable size and location.
There are three approaches to allocating the taxes. The first is aggregating the Fair Market Value of all the units/apartments in the building. The second is preparing an appraisal of the building based on what the building would be worth if the building was sold currently regardless of whether it is a co-ops or condos and the third requires a separate assessment of each apartment.
The problem with the first approach is that it would mean that the person living in the unimproved one bedroom apartment on the second floor of the building would have their taxes increased when the penthouse is sold for an astronomical price because the increased tax on the building would be allocated to each apartment or unit based on the pro rata share of the shares or common interests allocated to the unit and not the value of the residential units. Accordingly if not done carefully, the new system could hurt anyone owning a unit worth less than the most expensive unit in the building. Similarly, if the assessment is based on the aggregate value of the building (the second approach), the same problem results.
The third alternative would require that each apartment be assessed separately, but that would necessitate New York City assessing 750,000 units of co-op and condo housing, contained in over 12,000 corporations and associations; a herculean task that would require an army of assessors working for a decade. It would also necessitate every co-op apartment in New York City obtaining a separate Block and Lot number and amending the organizational documents of every cooperative to deal with the responsibility for the Real Estate Tax payment and the relative priority of liens. Although, that would be the only fair way to utilize a system based on Fair Market Value so that no one would be hurt by the condition of someone else’s apartment, it is unlikely that City Hall could undertake such an effort. It is also the only way that improved apartments would not impact the unimproved apartments.
Unfortunately TENNY is ignoring the biggest hurdle: how to implement a system that is actually fair to all of New York City’s homeowners, and it is also the reason why a temporary co-op and condo abatement has been in place for 25 years because there is no simple solution to this issue. Utilization of Fair Market Value has always been the goal, but the question is how to allocate the resulting taxes. TENNY dealt with the problem by ignoring it, which is why legislation is required.
Hopefully when the Legislature does act they will also consider all of the issues affecting housing and not just the low hanging fruit. With New York’s population loss greater than any other state, the focus should be on how to entice people to continue living here and get residents of other states moving to New York City and New York State because New York has to stop producing residents for Florida, Texas and Arizona.
