Win Against NYC's Property Tax Code
Win Against NYC's Property Tax Code
Refresher on the tax code, how to take advantage of the current system, and some ideas on what tax code reform could look like.
The NY Supreme Court recently agreed to hear Tax Equity Now New York (TENNY) a NY housing Coalition's case for tax reform in NYC. TENNY could leverage its seven-year legal battle into meaningful property tax reform in NYC. This case is putting the microscope on property taxes in NYC. Property taxes can eat large portions of Gross Incomes. Unlike other building management expenses, taxes are usually out of ownership control. Landlords cannot negotiate or optimize for preferential tax structures after purchasing assets. The higher the taxes as a portion of Gross Income, the greater the fixed operating leverage and the more sensitive the assets will be to fluctuations in rent received. The passing of Good Cause Eviction, which caps rents, might hurt profitability for owners with taxes at 30% of gross income and growing. Investors must perform due diligence on taxes and understand tax growth patterns ahead of time. It's essential to understand the current design of the property tax system in NYC, how to take advantage of it, and what potential reforms could look like.
1. Current Design of NYC Property Taxes
Some investors I speak to decry property tax growth trends. Others don't mention taxes because they understand the tax code and buy properties with tax schedules they plan for or can manage. Below is a quick refresher on the way property taxes work in NYC.
(Market Value * Assessment Ratio) – Exemptions) * Tax Rate = Property Taxes Owed
The city assessor determines the market value in NYC and is updated every year. During transactions, it's rare for the Department of Finance's market value to match real market values.
Building types and tax classes drive assessment ratios (ARs). ARs are fixed ratios of 6% for tax class 1 buildings and 45% for tax class 2 buildings and do not change year to year. Primarily residential buildings with fewer than 11 units (residential or commercial) are considered tax class 1, 2a, or 2b buildings, and they have caps on the yearly increases in assessed values. Assessed values will be limited to the prior year's value + 6% (tax class 1) or +8% (tax class 2b), regardless of market value fluctuations. The only exception to this is when reassessments are performed in response to physical property changes from renovation work. Purchasing property with caps on assessed value growth 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 (more on 421-A buildings here and here).
Multiply the AR by the Market Value to get the Assessed Value. Multiply the assessed value by the tax rate, which provides you with the annual taxes paid.
The City Council decides the tax rates each year, but since 2008, the tax rates have been consistent with only minor changes. The latest update for the 2025 tax year is below:
Property Tax Rates for Tax Year 2025 (Figure 1)
Tax class 3 are public utility properties, and tax class 4 comprises all commercial real estate such as office buildings, hotels, warehouses, retail, etc.
2. How To Take Advantage of The Tax Code
As noted in the above property tax rate, not all properties get taxed equally. Some multifamily properties have caps on assessed value growth. That cap does to taxes what rent stabilization does to rents. When trended out over time, thousands of properties will pay effective tax rates, defined as taxes paid divided by market value, that are less than 1%. This is the case, independent of property values. In other words, small buildings in high-traffic, high-rent areas with less than ten units may contribute less than 7% of their Gross Income to property taxes. Low expenses and taxes act as a strong hedge against volatile rental incomes. In NYC, where the introduction of new rent controls is frequent, evictions take time, and administrative burdens and compliance measures are ever-evolving, having a lower cost base and lower fixed operating leverage is critical when rent growth projections don't pencil.
The idea is like owning properties debt-free in that low taxes act as an additional safeguard against bumps in the road. Unforeseen things will happen in the business plan, making execution and repositioning difficult. Having to pay a large fee, whether to the bank for a mortgage or the state government in the form of taxes adds to the pressure.
Tax class 1 buildings paid less than 1% of their Market Value in annual property taxes. Tax class 2a/2b buildings ‘small rentals’ paid about double that, and multifamily properties with 11 or more units paid about double that of small rentals, or 4x the ratio of Taxes/Market Value as their smaller counterparts. The chart below speaks to this.
Effective Property Tax Rates by Property Type (Figure 2)
Low taxes are a valuable hedge when revenues fall short due to unforeseen circumstances, and they also reinforce value when units lease above projected rents and the gross income is exactly as projected. This is why low-unit count buildings in NYC can sell for high prices per unit. They offer investors capped costs and great revenue.
Premiums Paid for Small Buildings
Buying properties with tax caps will only work for select investors. It's the opposite of scaling, and for investment firms that need to deploy +$50m, it requires doing many more transactions than larger unit deals.
As shown in Figure 2, larger rental buildings pay disproportionately more in taxes as a portion of market value and gross income. These buildings carry heavier expense loads and must be managed effectively to avoid problems. NYC's budget has grown approximately 5.7% annually from 2012-2019 and 7.8% a year from 2020-2023, according to the Mayor's Office of Management and Budget. Real Estate Property Taxes historically fund ~45% of NYC’s Budget. To offset these increases in budget size, investors should underwrite and expect rent growth that is equal to or greater than what their taxes will grow by.
Owners buying larger properties need to be keenly aware of the trends and real-life events like the wave of migrants or the overhanging effects of the pandemic that contribute to growing budgets. The City creates the budget first and then backs out how much the property tax contribution needs to be to fill the gap. There is no cap, which means purchasers must have reliable plans to grow rents to avoid operating expenses growing beyond what's manageable.
Growth in NYC’s Budget in Last 12 Years
3. Potential Reforms To The Tax Code
The legal challenge that TENNY is waging is premised on the idea that there is variability in the effective tax rates (taxes paid/market value) based on property locations. In other words, similar assets by unit count pay varying effective tax rates depending on their location. The suit cites a few decadent condo properties (tax class 1) that pay fewer taxes than properties in areas with weaker economic indicators and poorer people, thus placing an uneven burden on working-class property owners.
From what I have seen, this may be true. Small properties in East New York pay more taxes in absolute terms than similar properties (sometimes larger!) in Crown Heights or Bedford Stuyvesant. I imagine Park Slope owners pay less in taxes as a portion of Market Value. It's worth remembering that small building owners in East New York, like those in Park Slope, benefit from the tax caps – since all tax class 1 buildings have tax caps no matter their neighborhood. Investors can observe the degree of savings on property taxes they would have with tax caps by looking at spreads between Assessed Values and Taxable Assessed Values.
580 Crescent Avenue
Tax Rate is 20.1%
Full Assessed Value is $53,640
Taxable Assessed Value (6-20% limitation -AV) is $32,246
Taxes today are $6,476
Taxes without the cap would be 20.1% * $53,640 = $10,774 (a 66% increase)
And they would increase at an accelerated rate moving forward.
It's difficult to predict what a new tax code could look like if it does pass. But here's what I don't think will happen:
Elimination of tax caps without a replacement
Making current tax caps even more rewarding
Making the property tax code more favorable for larger building owners
If TENNY's case is successful, tax reform could happen. Tax code reform would add another layer of uncertainty to the market that has had to contend with HSTPA, COVID-19, high interest rates, and Good Cause Eviction. Uncertainty invites risk, and that's not good. However, uncertainty also introduces opportunities for those willing to underwrite risks effectively and adjust their portfolios accordingly.
Sources: Citizen’s Budget Commission (CBC), Kiplinger Personal Finance
I am bullish on NYC Multifamily.
Call me at 646 326 2220.
Best Regards,
Romain Sinclair