Taxing Times

What did the finance commissioner know and when did he know it?

Something went wrong. Everyone agrees to that. But how and why it happened, no one seems to know (or if someone does, he or she is not telling). And it’s certainly a mess. What else can you call a situation in which a city agency uses the wrong figures to vastly overtax a large number of cooperatives and condominiums?

The agency with egg on its face is the New York City Department of Finance (DOF), which admitted that it had improperly used commercial-property rents – rather than residential rents – to set tax valuations for co-ops and condos in northeastern Queens. That has led to a situation in which government officials and others are calling for investigations and, in one instance, for the tax commissioner’s resignation.

Although citywide valuation tax increases for Class 2 properties (co-ops and condos) went up just 7.98 percent, in northeastern Queens they went up by 146 percent. City Councilman Mark Weprin is just one of many who are asking why this discrepancy didn’t raise a red flag with Finance Commissioner David M. Frankel. (He kept insisting that the numbers were correct since northeastern Queens had been “undervalued” for years.) Furthermore, if the numbers were correct, why did Frankel arbitrarily cap increases at 50 percent once the co-ops and condos began their highly public protests in February?

The issue has reached all the way to Albany, with State Senator Toby Ann Stavisky filing a Freedom of Information Law request with the Department of Finance to help ascertain if this was a simple error or something more. She’s also drafted a bill that would take co-ops and condos out of Class 2 and put them into a new part of Class 1, alongside traditional single-family homes.

“Right now we’re calling it Class 1A and Class 1B,” Stavisky says. “Co-ops and condos are more closely related to small family homes than they are to rental properties. By moving them to Class 1, we would [automatically] be capping [their annual] assessed valuation, because the cap on Class 1 is six percent.”

New York State’s Real Property Tax Law, Section 581, currently requires cooperatives or condominiums to be valued for tax purposes as if they were rentals. This means their values are derived from comparison with similar rental buildings, or “comparables.” “The point is to treat co-op [and condo] owners like single-family homeowners, because they’re not like landlords who rent out apartments,” says State Assemblyman Edward C. Braunstein, who is sponsoring a version of the Stavisky bill. “Co-op [and condo] owners’ property tax is assessed like they could get rental income.”

Glitch-craft

The core issue: where did these commercial-building comparables came from? DOF spokesman Owen Stone says it was computer error. “Our system spit out some comparables that said ‘apartment,’ and when we looked at it again it was something that had some sort of commercial element to it.”

Computers, however, have to be programmed, and commercial and residential buildings have discrete letter classifications that everyone should be able to tell apart.

The commercial comparables came to light in late March when the DOF posted the bases for all its comparables on its website, says Eric Weiss, a partner at Tuchman Korngold Weiss Lippman & Gelles and also the attorney for the massive 2,904-unit, 134-building cooperative Glen Oaks Village.

“We saw what kind of properties they were using for [our] comps,” he says. “For Glen Oaks, they were using mixed-use buildings, classified as K class, which is a retail classification. I think there were K-4 [buildings], which are stores with apartments above them, and K-2, which is two-story retail.” Commercial rents are much higher than residential rents. “One comparable was classified as a C-5, which is a converted rooming or boarding house.” None, he says, were the same as the garden apartments – a separate classification – that comprise Glen Oaks Village.

What’s most curious about this is that the complex itself has hundreds of rental apartments that could – and certainly should – have been used for the comparables. “What could be better for valuation of Glen Oaks than Glen Oaks itself?” asks Geoffrey Mazel, a partner at Hankin & Mazel and attorney for the nearby 1,024-unit, multi-building Le Havre co-op (which was hit with a 122 percent valuation increase).

Glen Oaks Village board president Bob Friedrich “sent those [rental-apartment] figures to Frankel,” Mazel says, but received no answer, no reason, and no rationale whatsoever for why Glen Oaks’ own rentals were not employed.

“Using the same calculation method as the city, [Friedrich] came up with a vastly lower assessment valuation,” says the attorney, who suspects a deliberate attempt by the city to raise revenue artificially. “There’s a lot of discretion in the process. If you’re cherry-picking comparables to get a result, something’s wrong here.”

Whatever the case, Weiss brought his findings to Friedrich, who as head of the Queens co-op/condo-board group the Presidents Co-op Council disseminated the news among its members and the press.

 

What the DOF Says

Every year, Stone notes, the DOF first announces “a tentative assessment on January 15, and the final assessment roll on May 25. So, every year, we announce our values, and people have the opportunity to challenge them. If we need to review things, we review things; if we need to make changes, we make changes. We’re in the process of sending out revised notices of value for all properties that we made changes to, as we do every year.” As of mid-April, 139 properties had had their tax valuations lowered, he says, “not necessarily as a result of these commercial properties on our comparables list but as a result of the overall review that we did.”

He dismisses the possibility of a human programmer having what are colloquially called “fat thumbs” and inadvertently mistyping data or directives into DOF’s computer model. And without speculating as to how or why the commercial-buildings data was entered – critics contend it was a deliberate attempt to raise revenue illegally during a budget-strapped year for the city – he admits that the department believes Queens valuations had been too low in years past.

“We’ve looked at historical data, and we’ve seen that in most areas you should have rental incomes and co-op/condo incomes going in the same direction,” he says. “We found that over the past five years in Queens, rental incomes have increased some number over 10 percent and co-ops’ [and condos’] incomes have declined somewhere over 10 percent. The normal correlation that you would expect was not there. In Manhattan and Brooklyn, the median co-op income and median rental income had about a one-to-one relationship [during that period]. This year, we did see rental income and co-op income going in the same direction in Queens, and that was something different than what we’ve seen over the course of the last five years.”

Yet that five-year, 20 percent gap between rental and co-op/condo figures is a far cry from the high double-digit and triple-digit increases socked to northeastern Queens this year – leading Friedrich to suspect that the DOF rigged the system in order to address the purported undervaluation (which in fact may have been true valuation, as the department apparently considered it for the past five years).

“They have a list of 1,000 comparable buildings they could use,” Friedrich contends. “Each has its own rent roll, and rather than use the same comparables as last year, they use different comparables, with much higher rent rolls. Even in cases where they’re using like-kind comparables, they’re cherry-picking ones with higher rent rolls.”

That, however, is the least of it, he says. “The tax commissioner steadfastly refused to acknowledge that there could be any problem with the [comparables] selection process until he was caught red-handed. As president of one of the largest co-ops in New York, I’m asking him to step down and for a full investigation of the process.”

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