I. What could be done to make the effective tax rate that large rental property owners pay more aligned to similarly valued homes?

Given the gap between DOF’s assessments and sales-based assessments, reforming the system to use a sales-based market value for coops and condos could help eliminate disparities in effective tax rates both among the classes and within Class 2. This section explores how such a reform might work in practice. 

Previous proposals to reform New York City’s property tax system have focused on owned properties rather than rentals. The 2021 New York City Advisory Commission on Property Tax Reform proposed moving coops and condos into the same class as Class 1 properties,¹ which now includes only one- to three-unit homes, so that owner-occupied properties are grouped into one class and assessed in the same manner, i.e., based on sale prices.² Other proposals have called for moving coops and condos into their own class (e.g., creating a new Class 5), but treating them like the 1-3 unit homes in Class 1.³

Proposals to place coops and condos in a different class from other residential properties have existed for decades.⁴ One reason to separate coops and condos into their own class and not move them into Class 1 would be to avoid forming a single class with all of the city’s homeownership properties. Owners of single-family homes, coops and condos have more at stake in how the property tax system is structured than renters, because the amount of property taxes an owner must pay directly affects the value of the home. Because homeowners have historically been more politically active than renters, it may make sense to avoid creating a single homeowner class with concentrated political power.⁵

In this section of the report, we assess four different possible pathways, using the 2021 Tax Commission’s numbers as the basis for the modeling.⁶ Each modeled path uses sales-based market values to assess coops and condos rather than DOF’s market values. We model the impact of the 2021 Tax Commission’s proposal to move coops and condos into Class 1 in a manner that is revenue neutral. The other three options are testing what it would look like to address other disparities. In Option 2 and 3 we are testing what it looks like to align coops and condos with other Class 1 homeowners. In Option 4 we are testing what it looks like to align the effective tax rate of coops and condos to that of rentals. The goal was to explore scenarios in which coops and condos face the same ETRs as that of either Class 1 or Class 2, and examine the implications for changes in tax revenues.

• Option 1, Revenue Neutral, Same Levy Approach:
  • Treat coops and condos similarly to Class 1 properties by using sales-based market values.
  • Don’t use fractional assessment (essentially, setting the assessment ratio at 100%). 
  • Establish a tax rate that keeps the total amount of the levy paid by each of these sub-classes the same as what they currently pay in Class 2 (although the distribution of tax burden among individual coops and condos shifts when values shift to reflect their sales value).⁷
• Option 2, Target Assessment Ratio Approach: 
  • Treat coops and condos similarly to Class 1 properties by using sales-based market values.
  • Use the same tax rate for coops and condos as currently applied to Class 1.
  • Use the Class 1 target 6 percent assessment ratio rather than the actual ratio of 3.33 percent that applies overall in Class 1.⁸
• Option 3, Actual Assessment Ratio Approach:
  • Treat coops and condos similarly to Class 1 properties by using sales-based market values. 
  • Use the same tax rate as currently applied to Class 1.
  • Use the current, actual assessment ratio for Class 1 of 3.33 percent.
• Option 4, Parity with Class 2 Rental Properties Approach:
  • Treat coops and condos similarly to Class 1 properties by using sales-based market values.
  • Equalize the effective tax rate between coops and condos and large rental properties.

Table 1:

Option 1 generates no additional revenue, and effective tax rates of 0.71 for condos and 0.84 for coops while large rentals have an effective tax rate of 1.33. 

Option 1 most closely matches the proposal by the Property Tax Commission in their Final Report. The commission recommended moving coops, condos, and small rentals to the same class as 1-3 unit homes (currently Class 1), valuing them based on sales, ending fractional assessments across Class 1 (setting their assessed values at full market value, rather than 6% of market value), eliminating caps on assessed value growth, and applying a 5-year transition period for market value changes, while maintaining revenue neutrality. In our model, we explore the potential impact of this approach on coops and condos at a single point in time, and therefore do not incorporate longitudinal changes to caps or the transitional values.⁹

Under this approach, the ETRs for each group, calculated as the value of the tax levy divided by the sales-based market values, remain the same. Condos have an ETR of 0.71, coops have an ETR of 0.84 and large rental properties have an ETR of 1.33.¹⁰

Under Option 2, condos and coops are assessed using sales-based market values rather than DOF’s estimates. This shift to sales-based market values increases the taxable base of coops and condos, particularly at the top of the market, enough to generate additional tax revenue using 6 percent for the assessment ratio.¹¹ Using sales-based market values and then applying the Class 1 tax rate to coops and condos, we estimate that assessing these properties would result in approximately $3.04 billion in additional tax revenue.

If policymakers chose to move coops and condos into Class 1 or create a new class (e.g., Class 5) for coops and condos and then chose Option 2 (to apply the 6% target assessment ratio and tax rate for Class 1 to coops and condos), the increased revenue could then be used to reduce property tax burdens elsewhere in the system, e.g., helping to erase some of the system’s disparities between rentals and owned properties. For example, the resulting additional revenue from Option 2 could be used to reduce the levy for Class 2’s larger rentals. Doing so could lower the ETR of larger rentals to as low as 0.54, bringing it from above that of all other residential property types to below that of Class 1 properties (Table 2). 

Table 2:

Option 3 applies the existing average assessment ratio in Class 1 to coops and condos, resulting in a net revenue loss of $500 million, effective tax rates of 0.70 for both coops and condos while large rentals would continue to have an effective tax rate of 1.33. 

While Class 1 properties are subject to a target assessment ratio of 6 percent, caps on annual and multi-year increases in assessed value have prevented assessments for many Class 1 properties from keeping pace with rising market values. Over time, the effect of these caps compound, creating a growing gap between assessed and market value. As a result, the overall assessment ratio for Class 1 properties, measured relative to true market value, is substantially lower—about 3.33 percent in our estimates. 

Under Option 3, we use sales-based market values but then align the ETRs of coops and condos with those of Class 1 properties, and apply the lower 3.33 percent effective assessment ratio rather than the 6 percent target ratio. Under this approach, the higher market values produced by assessing coops and condos based on sales would not be enough to offset the relatively broader drop driven by the substantial decrease in the assessment ratio. Overall, this change would result in a net revenue loss from coops and condos of roughly $500 million.

Option 4 treats coops and condos the same as large rentals, resulting in $3.49 billion in additional revenue, and effective tax rates of 1.33 for coops and condos, the same ETR large rentals currently pay. The additional revenue is available to bring the effective tax rate of large rentals (or large rentals and coops and condos) down.

Option 4 is similar to Option 2, except that instead of setting the ETR for condos and coops equal to that of Class 1 properties that are at the target assessment ratio, we instead set it to align with the sales-based ETR larger rental properties currently pay. Using this ETR of 1.33 percent, we see a large increase in revenue of close to $3.5 billion. While coops, condos, and large rentals would continue to pay a higher ETR than Class 1 owners, all the large multifamily buildings would be treated equally, regardless of whether their apartments are owner-occupied or rented. The additional revenue created by the use of sale-based values for coops and condos could be used to reduce the disparity between the large and 1-3 unit buildings, reduce the taxes paid by owners of rental buildings, or allow other modifications in the tax system.

Table 3:

a. Key Takeaways

By modeling a series of potential reforms to condos and coops, we illustrate the impact of valuing those properties based on sales rather than comparing them to rentals. Our models find that such changes could add additional revenue or be used to reduce disparities in tax rates between rental properties and coops and condos.

Implementation of these options would require changes to state law, but this analysis illustrates the potential impact of assessing coops and condos based on their sales value and treating them more consistently with other property types. 

Collectively, these options would result both in changes in the distribution of the tax burden among and within classes, and in significant changes (both negative and positive) in the taxes levied on individual properties. Any implementation plan accordingly should be phased in over time to allow households to adjust and to minimize broader economic disruption. Broad adjustments, including a shift to sales-based market values and changes to how condos and coops are taxed, could be phased in over 5 to 10 years using mechanisms such as transitional assessed values to smooth changes in tax liability. Such changes should be predetermined and self-executing, however, to limit opportunities for political pressure to delay or dilute their implementation.

In addition, any reform would need to contend with the constraints imposed by the class share system, which governs how the total tax levy is distributed across classes and may limit how these gains can be reallocated in practice. Reforms to the class share system would also require changes to state law.