Small-building owners faced with property-tax puzzle

By Natalie Huet

Tougher than Sudoku, making sense of New York City’s real estate property tax can be next to impossible. One Chelsea property owner, however, sought to understand why one-third of her rental income was going toward property tax bills. And she was shocked by her findings: Her apartment building is taxed up to five times more than buildings of similar market value in other neighborhoods—and there are inequities in Chelsea itself.

“It’s extremely unfair,” property owner Ellen Wexler recently told Chelsea Now. “The law says a million dollar building in one part of the city should be taxed as much as a million dollar building in another part of the city.”

An artist who is married to a teacher, since 1978 Wexler has been a resident of the rental property she owns at 305 W. 20th St., whose market value sits at $1.21 million, with a current tax of $33,000 a year.

Meanwhile, across the city, other buildings with a similar or higher market value are being taxed up to five times less. Take 359 Fourth St., in the Park Slope section of Brooklyn: According to the Department of Finance (DOF) tax records, this building is worth $2.37 million—twice as much as Wexler’s—but last year its owner paid only $5,675 of property tax.

“How does this craziness happen?” Wexler asked in March at a public hearing of the New York City Council’s Finance Committee. “I am here today because I am desperate. I am the face of one New Yorker who is being assaulted with such a huge and unfair real [estate] tax assessment that my ability to continue living in and managing my building is severely threatened.”

PROPERTY TAX PUZZLE

Under state legislation enacted in 1981, real estate property in New York City is divided into four classes. Wexler’s property, a small residential rental building with seven units, falls into class 2. Its market value is based not on how much the building would sell for (as with houses), but on the income generated by renting the building’s units. Of this income-based market value, only a fraction—an assessment—is taxable, and although assessments are readjusted every year, the law prohibits the DOF from raising them by more than 8 percent each year for small rentals.

The assessment caps are meant to protect small landlords from rapid tax increases—no matter how much rents and property values may rise—in the same way homeowners are protected. But they also create citywide discrepancies in tax burdens, depending on a building’s initial assessment and the rental-income increases—or lack thereof—undergone since then.

In 1984, when the assessment caps were first enacted, Wexler’s property was assessed at $100,000, and the Brooklyn property at $19,000. Consequently, Wexler’s tax increases have been relatively large—and have outpaced her rental income—even with the caps in place. According to the DOF, the average assessment for a class 2 building is around 15 percent of current market value. Wexler’s building is currently being assessed at 21 percent, while the Brooklyn building—located in another gentrified area that has undergone rental increases—is at less than 2 percent.

“It’s all got to do with the [assessment] caps,” said DOF spokesman Owen Stone. “The assessed value for the Brooklyn property was much lower when the caps started taking effect.”

Wexler has been feeling the results of her high initial assessment. Since 1998, her taxes have jumped from $17,000 to $33,000, though her rental income has increased only from $91,000 to $100,000. Part of the problem is that three of her six units are rent-stabilized.

“The past 10 years have been financially difficult. Why would you have a million dollar building and be losing money on it every year? Why would you continue?” she asked. “Meanwhile, I have friends in Park Slope who are just hoping the city doesn’t notice them, because they’re basically living for free.”

But not every Chelsea property owner feels hobbled by high taxes. Bill Stone has owned 130 Tenth Ave., home of the popular La Luncheonette restaurant, since 1979. The building has three full-floor, market-rate apartments above the restaurant, and a small house in the back (Stone believes it may be the oldest building in Chelsea). On the building, for which this year the DOF gave a market value of $1.6 million, Stone will pay $24,000 in taxes. He also owns the three-story building next door, which is occupied entirely by the art gallery Alexander and Bonin, and part of a five-story loft building where he has his own artist studio, at 136 Tenth Ave.

Stone, who lives in Tribeca, works full-time as an artist and said he is able to live off the income from his Chelsea buildings, which lie on a major throroughfare and which he described as “quite profitable” because of the combination of residential and commercial tenants, along with cell-phone towers he has allowed on the roofs. Stone acknowledged that rent-regulated units and other factors might hamper some of his Chelsea neighbors from making their buildings as profitable as his, but he remained philosophical. “People always complain about taxes, no matter how high or low they are,” he said. “I don't think I pay too much. I know buildings like this that are paying a lot more.”

Wexler, for instance, pays higher taxes for her building—which has no commercial tenants—than Stone pays on his Luncheonette building. She said she spends approximately 15 hours a week managing the property because she cannot afford to hire a superintendent. She also reported to the DOF that the cost for maintaining and upgrading the building exceeded $75,000 last year.

Landlords usually compensate for higher taxes in the form of higher rents, except for rent-stabilized units. Wexler’s market-rate units—which feature two bedrooms and two baths—have an average rent of $2,800. “I just can’t get more than I’m already getting, or people won’t take them,” Wexler said. “I would have to upgrade them. I just can’t keep up with these luxury buildings that are offering marble countertops.”

UNAFFORDABLE HOUSING

Wexler said high real estate taxes are making small buildings less profitable, and driving mom-and-pop shops out of business. “Everyone’s complaining about having Starbucks and Gap on every corner of our communities,” she said. “But because real estate taxes have gone up so much, [small] building owners are desperate to make income, and they’re raising the rents tremendously—and who can pay high rents but Starbucks and the Gap?”

Frank Ricci, lobbyist for the Rent Stabilization Association—a trade association for landlords and building managers—said high property taxes were “the No.1 complaint” of small landlords like Wexler, who he said provide most of the city’s middle-class housing. “Now they’re going to get any rent increase they can to make ends meet, and that’s not good for affordable housing,” Ricci said.

Rosa Maria de la Torre, coordinator of Chelsea Housing Group—a tenant advocacy and organizing program at Hudson Guild—rejected that argument, saying that landlords always complain about taxes and try to pass on every cost to the renters anyway. “Landlords act like they’re not getting a penny. It’s all about maintaining a high profit margin,” she said.

Dave Hanzel, policy director at the Association for Neighborhood and Housing Development—a tenant advocacy group—offered a more balanced perspective. He was careful to point out that the tax funds public services. The property tax indeed represents the largest single source of city revenue—around $14 billion each year—providing for better schools, cleaner parks, safer streets and infrastructure improvement projects. But Hanzel said that property taxes passed on to renters in the form of higher rents are “an extra pinch” for lower- and middle-income New Yorkers.

Property owners feeling a similar pinch can seek reduced tax bills by filing an appeal of their assessment to the New York City Tax Commission. Despite the profitability of Stone’s buildings, he still hires a law firm to appeal to the Department of Finances for a tax reduction each year. Earlier this year, without the help of a lawyer, Wexler also contested her assessment, highlighting how her taxes, added to her expenses, simply outweighed her rental income. The DOF just recently promised her a reduced tax bill.

“They realized this is crazy,” Wexler said. “I think now I’m down to $26,000 [in tax]. But it’s still double what it should be, because the whole neighborhood is over-assessed. And next year, I’ll probably have to fight my taxes again. That’s not a viable answer.”

FIGHTING FOR FAIRNESS

Wexler has discussed her problem with the Small Property Owners of New York (SPONY), a private organization of landlords currently lobbying city and state officials for more equitable assessments.

“This is a very large concern [for small property owners] in the five boroughs,” said SPONY President Roberta Bernstein, who added that her group will hold a private meeting with New York City Finance Commissioner Martha Stark in the near future.

Back in 2005, Stark listened to complaints from SPONY members at one of their meetings. She said then that on average, 18 to 20 percent of the total income of a rental property should go toward the property tax, and she pledged to try to make assessments fall within this average. A few months later, in January 2006, the DOF announced it would considerably reduce assessments for small rental buildings.

Wexler saw her taxes cut in half. “I was so excited,” she recalled. But two weeks later the DOF reversed itself, after the tax reduction ran into objections from budget officials concerned about the lost revenue and city lawyers worried about possible lawsuits from other landlords not covered by the reduction.

Following this false alarm, in April 2006, State Senator Golden (Brooklyn) introduced a bill requiring small apartment buildings to be assessed at a uniform ratio throughout New York City. The bill would untie DOF’s hands and allow it to reduce assessments when they are above average, as in Wexler’s case. The bill passed the Senate but was forwarded to the Assembly’s Real Property Taxation Committee at the end of the last legislative session—in other words, too late for it to get through. Both SPONY and the Rent Stabilization Association have been pressuring the bill’s sponsors to put it back on the Assembly’s agenda. A new version of the bill, sponsored by Assemblymember Peter Abbate (D-Brooklyn), will be introduced in the next few weeks.

Assemblywoman Deborah Glick (D-Manhattan), whose district abuts Chelsea, said she would support a bill that requires a uniform assessment ratio for small rentals. “I think it’s a laudable goal,” she said. “Small owners have particular issues, and their concerns have always been overshadowed by concerns of large landlords who do not face the same financial pressures.”

Ellen Wexler is holding out for such legislative relief. “I’m hoping I will be able to get the taxes fairer,” she said. “And maybe I’ll go into my savings and invest in upgrading the building. But yes, I’m hoping that it will be again worth having my building here.”

— with additional reporting by Barry Paddock