Steven Spinola: Real property tax inequities abound in New York

The real property tax is the most stable and important source of revenue for the city. Last year, the real property tax generated $16.4 billion or 44% of the city's tax revenue. The property tax provides more revenue than the sales tax, the personal income tax, and all the major business taxes, such as the corporation tax. However, unlike the other taxes which impose a fixed tax rate based on how much money you make (personal or corporate income taxes) or on how much you pay for an item (sales tax), the real property tax system is confusing and inequitable in how it establishes the amount of taxes a property owner must pay. For instance, a single family home (Tax Class One) is assessed at 6% of the city's estimate of market value. If the city determines that a single family home is worth $1 million, it is assessed at $60,000 which is the value upon which it pays taxes. In contrast, an office building (Tax Class Four) is assessed at 45% of the city's estimate of market value. If an office building has a market value of $1 million, according to the city, it pays taxes on an assessed value of $450,000. This inequity in establishing a property's taxable assessed value between these two classes is further compounded by the legislatively mandated cap on assessment growth in Class One. Single-family homes cannot have their assessed value increase by more than 6% in any year and by more than 20% over five years. The property in Class Four has no cap on its annual assessment growth. However, market value increases in Class Four assessments are phased in over a five year period. The full impact of this inequitable tax treatment is more evident by comparing the total real estate tax paid by each class and their market value. Class One which contains one to three-family homes represents 50% of the market value of real estate in N.Y.C. and pays 14.8% of the real estate taxes. Class Four which contains office buildings, hotels, loft buildings and all other commercial and industrial property represents 24% of the market value of real estate in the city and pays more than 40% of the real estate taxes. This inequity in the tax levy burden borne by commercial property compared to single-family homes has a direct impact on business tenants and new office development. Real estate taxes for office tenants range from $17 to $23 per s/f. New office development is especially burdened by high real estate taxes. Given the cost of land and construction costs, new development in most cases would require more than $100 per s/f in rent to support the construction of a new office building. In this new building, taxes could exceed $25 per s/f, making new development virtually impossible without some form of tax exemption. Over the last ten years, real estate taxes on Manhattan office buildings have risen to $3.4 billion from $1.9 billion. This growth is expected to continue based on the recent report from the city. In the Fiscal Year 2012 tentative assessment roll released earlier this year, the city estimated that Class Four property increased 9.95%. Manhattan office buildings will see a greater increase: class A office buildings increased 12.24%; class B office buildings increased 14.53%. With these increases, Manhattan office properties have a value that is 16% higher today than they had at the peak of the market. Though most would agree that the real estate market has improved since last year, no one believes that real estate values are higher than they were three years ago. It is essential that the real property be valued accurately, that the tax levy burden be imposed fairly and that the real property tax system be clear and understandable to all taxpayers. Steven Spinola is the president of REBNY, New York, N.Y.