Multifamily tax rates are up 6% in NYC

Multifamily property tax rates have been raised by City Council for the upcoming year and commercial property tax rates were lowered. Taxes can range from a small expense to a significant portion of rental income and because of that it’s important to pay attention to the movements year to year. Some key points to highlight:

• Multifamily tax rates grew more than any other tax class and have risen close to 6% YOY .

• Commercial tax rates saw their steepest decline in 16 years down by 6.0% YOY.

Note: Tax rates painted a mixed picture of the real estate environment. Source: City Council Budget data.

Two things to note about this change:

1. These tax changes are on trend with what investors might expect given the current climate. Rents on apartments in Manhattan have been breaking record after record. On the other hand, retail has had a spotty recovery, and office buildings have mid-teens vacancy levels, with more leases due to expire in the upcoming years, and WeWork is teetering on the edge of collapse.

2. Property taxes rates do not tell the full story. Though tax rates may have risen for multifamily, it doesn’t stand to reason that taxes paid will too. Other items to consider are tax assessments, exemptions, and market values.

As a refresher, property taxes in NYC are calculated as follows:

((Market value * assessment ratio) – any exemptions) * tax rate = property taxes paid

The market value in NYC is determined by the city assessor and is updated every year. Intended to reflect the value of the property on the open market, the market value always seems to be many times lower than *real* market values, in practice. Assessment ratios are based upon building type and tax class. These are fixed ratios and do not change year to year. It is common in tax classes 1 and 2a/2b, multifamily buildings under 10 units, to have caps on the yearly increases on assessed values. The assessed value will be limited to last year’s value + 6% or 8%, regardless of market value fluctuations. This has been a point of interest for some investment firms looking at the NYC market. Some properties have exemptions that reduce their assessed values as well. A 421 A tax abatement, for example, would make the assessed value much lower than what it otherwise would be for a given property. Whatever the assessed value come out to be gets multiplied by the tax rate. And this becomes the annual taxes paid by owners.

Other stories of interest:

• California is doing what Governor Hochul could not in NY

  San Bernardino failed to submit a housing plan to the state of California in October 2021. Under California law, the failure to build enough new housing per year, or the failure to submit plans for such future development, constitutes a breach of housing policy. By failing to submit a plan, California’s Builder’s remedy policy allows multifamily developers to submit new projects directly to the state for approval, effectively bypassing their local jurisdictions. The rule has not been in effect long enough to witness the consequences of noncompliance. The result of this transgression by San Bernardino: the city has until February 2024 to submit a plan where it details its strategy to build 8,123 new housing units by 2029. It also needs to update its zoning code by April of next year. NY Governor Hochul tried to spur additional housing in NY state by imposing a similar mandate on NY towns and cities. Build more (1-3% more), she said, or I will give developers the okay to build whatever they want, given that it contains some affordable units. NY legislators scoffed at that. Too bad. 8,123 additional apartments sound nice.

• Signature Bank Loans are hitting the market soon

  It is likely that the FDIC will grease the wheels of the sale by offering bidders on the loan portfolio equity and debt financing for their purchases. Let’s say that the FDIC would sell the loan pool to someone for a hypothetical $300M. Out of that $300M the buyer might be required to pay only $60M in cash proceeds. The FDIC would extend the buyer a $120M loan, and it would also take equity in the deal at a value of $120M. There are different ways to structure the sale, but it is expected that the FDIC sells interests in the portfolio, while retaining a significant chunk of equity. Will this prevent the marking to market of the loans? It’s tough to say. In the aftermath of the GFC of 2008, the FDIC employed this approach to sell properties swiftly, sometimes at prices close to 45% of original loan balances. When the Signature loans are sold, the price signal from the sale is expected to hurt NY multifamily lenders whose own portfolios will be marked down.

Source: TREPP, San Bernardino Sun, Rosenberg & Estis, PC