How a $2 Million Condo in Brooklyn Ends Up With a $157 Tax Bill

Opaque methods, hypothetical numbers and ‘bonkers’ adjustments shift the property-tax burden toward middle- and working-class New Yorkers

By Jason Grotto, Caleb Melby, Mira Rojanasakul and Paul Murray

October 14, 2021, 12:01 AM EDT

A condo in Brooklyn's fashionable Williamsburg neighborhood sells for $2.15 million. Along with Sub-Zero appliances, 13-foot ceilings and a rooftop sun deck, it comes with a lucrative perk: an annual property tax bill of just $157.

Fifteen miles away, in the Bronx’s Throggs Neck neighborhood, a condo in a white building dotted with window-unit air conditioners goes for $234,840. Its annual property tax bill: $3,917.

The details of this particular comparison are stunning: The Williamsburg condo had an effective tax rate of 0.007% on its market value, while the Bronx condo's was 1.7%—more than 200 times higher. Yet across New York’s residential real estate markets, unequal tax bills are commonplace, and they stem in large part from a flawed process for determining property values for tax purposes. City officials have acknowledged some unfairness, but they're far less forthcoming about what causes it.

For years, when confronted with complaints of uneven property taxes, the New York City Department of Finance has blamed a state law that requires it to ignore the sale prices of condos and co-ops when determining their taxable value. Instead, the law requires city assessors to engage in a kind of thought experiment: Pretend co-ops and condos produce income for their owners—even though they don’t—and set their taxable values based on a hypothetical amount of income they’d generate if they did.

That law, designed to protect condos and co-ops from higher taxes, lays the groundwork for warped results. But now, for the first time, a Bloomberg News investigation reveals that city officials have made a bad situation worse. They’ve invented data points that bear no resemblance to market reality and used them in opaque calculations that tend to favor wealthy property owners. These flawed valuations shift hundreds of millions of dollars in tax burden from higher- to lower-priced properties and to rental apartment buildings every year.

City ordinances have created special exemptions that reduce taxable values for qualifying properties and abatements that shrink eligible tax bills—special breaks that have significant effects. But flawed valuations present a problem at a deeper level, one that’s far less apparent to most taxpayers.

A Bloomberg analysis of millions of city records related to condo sales and taxes shows that, in effect, two steps in New York’s assessment process combine to help perpetuate unfairness. First, city officials reduce the taxable values of condos across the board by adjusting an important data point—the so-called capitalization rate—in their calculations. Capitalization rates help investors gauge the value of income-producing properties; the higher the rate, the lower the property value. The rate that assessors apply is more than double the actual rates reflected in New York real estate markets.

New York City grossly undervalues condos

Median values, fiscal years 2017-2019

Note: Sales filtered for arm’s-length transactions, outliers trimmed using International Association of Assessing Officers standards.

Data: New York City Department of Finance

Five Key Takeaways From Bloomberg’s Study of NYC Property Taxes

Read the full methodology here

As a result, New York condo owners see low taxable values on their annual bills. But here’s what they don’t necessarily see: In modest neighborhoods, those values are set somewhat closer to actual sale prices; in upscale areas, they’re much farther below the market. In other words, big-dollar properties get a bigger break.

That citywide phenomenon stems from the second step in the assessors’ process: They create their hypothetical income estimates by using data that reflect comparatively high amounts for the low-priced condos and relatively low amounts for the high-priced, an analysis of actual sales prices and city data shows.

Note: Sales filtered for arm’s-length transactions, outliers trimmed using International Association of Assessing Officers standards.

Data: New York City Department of Finance

Bloomberg found that officials have used opaque methods to adjust these data inputs, producing results that depart from market realities. The process drives down taxable values for tens of thousands of condos en masse, by about 80% on average—inaccuracies that occur before any exemptions or abatements take effect. (The city uses a similar approach to value co-op buildings. But a lack of readily available data on the property taxes that individual co-op units pay precludes a similar analysis of co-op valuations.)

“They are wildly undervaluing properties and, as they’re trying to make up income for residential buildings, they’re biasing their estimates too,” said Andrew Hayashi, a University of Virginia law professor who specializes in property taxation and has examined New York’s system. Hayashi, one of four independent experts who reviewed Bloomberg’s analysis, added: “I don’t see how state law constrains them from doing a better job on this.”

City officials declined to grant interviews for this story. In written responses to questions, they defended the methods they use and attributed any unfairness or inaccuracies to the state law they have to follow. Standards set by the international industry group for assessment officials call for local offices to conduct regular studies of their fairness and accuracy, but New York officials say they haven’t done such studies for condos, co-ops or rentals.

The industry standard for fairness studies is a “sales-ratio” analysis, which compares prices for recently sold properties to the assessors’ values for them. Bloomberg’s analysis used sales ratios to determine how closely assessors’ values for condos and rental buildings track with actual market prices. City officials said that because state law requires them to use a hypothetical income-based approach for valuing condos and co-ops, using sale prices to check their results isn’t valid.

Yet several national experts say sales-ratio studies are the best tool for gauging assessors’ accuracy—even for income-producing properties. “Assessment offices must attempt to derive market value and ratio studies establish whether that job is done accurately,” the International Association of Assessing Officers said in a written statement.

Independent property-tax experts have used sales-ratio studies to examine New York; one of the most recent found that flawed valuations for condos shift roughly $292 million in annual property taxes from the top 10% of such residences by value to the remaining 90%. The author, Christopher Berry, a professor at the University of Chicago’s Harris School of Public Policy, found an even larger such shift for single-family homes: $450 million.

Owners such as Jeesselle Suero and Domino Kirke reflect how these shifts affect New Yorkers. It was Suero who purchased the Throggs Neck apartment in 2018, when the annual property tax bill was $3,917. And it was Kirke, a singer, actress and doula to celebrity clients, who sold the $2.15 million condo in Williamsburg in 2019, the same year its tax bill totaled $157.

Much of the disparity in their tax bills stems from the values that city officials arrived at for each property: They valued Suero’s unit at $85,774, about 37% of its actual market value. Kirke’s unit was valued at $279,079, just 13% of its market value. (After that, tax breaks for converting old buildings into condos drove Kirke’s 2019 tax bill down to $157.)

The contrast stunned Suero, who at first told a Bloomberg reporter that the figures must be incorrect. “It’s not right,” she said. “I don’t mind paying my fair share, but I want everybody else to pay their fair share.” In a brief telephone call, Kirke said she recalled the Williamsburg apartment having low taxes, and declined to discuss the matter further.

U.S. property taxes, which raise more than $500 billion annually for public schools, fire departments and other local services, are supposed to be based on property values as determined by local assessors—the higher the assessment, the higher the tax bill. But a series of studies has shown systematic unfairness throughout the country: Officials tend to overvalue low-priced properties while undervaluing the high-priced. A University of Chicago study last year examined 2,600 U.S. counties and found that more than 9 out of 10 reflected this unfair pattern, known as regressivity. Researchers have highlighted New York City, which collects about $30 billion a year in property taxes, as a primary example.

The city’s valuations can produce absurd results. In 163 cases across New York, assessors set values for entire condo buildings that are lower than the sales price of a single unit in the building, city sales and tax records for 2017 through 2019 show.

In Brooklyn, owners of rental apartment buildings pay an effective tax rate that’s more than eight times higher than the rate for condos, despite national standards that say New York officials should be treating them the same. The contrast suggests that the city’s assessment methods shift about $237 million in tax burden from condo owners to rental property owners in Brooklyn each year, Bloomberg found.

For condo owners on the losing end—those of comparatively modest means who pay higher effective tax rates—the system is so opaque that it’s hard for them to know they’re losing.

Note: Not all ratios appear on the chart. Binned regression line. Sales filtered for for arm’s-length transactions, outliers trimmed using International Association of Assessing Officers standards.

Data: New York City Department of Finance

Robert Donate paid $185,000 for a two-bedroom condo in the Bronx in December 2017. His first-year tax bill was $3,936, an effective tax rate of 2.1%. That doesn’t sound too bad—until you compare it to the average effective tax rate for condos citywide: 0.5%, or less than a quarter of his rate. “That’s kind of ridiculous,” Donate said. He knew that new-construction condos benefit from lucrative exemptions and abatements, he said, but he expected a fairer system nonetheless.

The breadth of this unfairness suggests it’s the result of systemic causes, not targeted favors for individual taxpayers. The city’s methods generate inequities on a mass scale with no favor-trading needed. But that hasn’t always been the case.

A man stands on a concrete curb in front of a beige brick apartment building. He has short, dark brown hair and is wearing jeans and a black polo shirt, where a black tattoo peeks out from one of the sleeves. — Robert Donate’s effective tax rate was four times the citywide average.

PHOTOGRAPH BY MATT GENOVESE FOR BLOOMBERG BUSINESSWEEK

In his heyday in the 1990s, Howie Habler was among the top earners in a crew that collected $10 million in dirty money across Manhattan, according to a federal indictment. He wasn’t a money launderer or a con artist. He was a property tax assessor.

Habler and 17 other assessors were indicted in 2002 on charges of taking bribes from commercial real estate interests to reduce property values across Manhattan. He pleaded guilty and was sentenced to 27 months in prison for his part in a scheme that federal prosecutors said spanned decades and included 562 properties.

According to court records, the crooked assessors were able to take bribes for decades without drawing attention. In an interview, Habler said his office’s tolerance for wide variations in assessors’ results helped camouflage his crimes.

“I could swing 30% and still be legit,” Habler recalled. “Fifteen one way and 15 the other. And still get paid for it from both ends; get my salary and from somebody in the street.”

The 30% “swing” that Habler describes doesn’t meet national assessment standards that call for “uniformity.” Put simply, the value assigned to every property of a particular type should represent the same portion of its actual market value. Theoretically, that should result in no swing at all. But nobody’s perfect, so experts developed a standard that allows some leeway:

Divide each property’s estimated value by its actual market price to produce a set of scores. Then take the median score—the one that sits in the middle—and make sure all your results stay within 7.5 percentage points on either side. Average scores outside that 15 percentage point range don’t meet the standard.

Today, New York’s uniformity scores for condo valuations have a range of more than 35%, Bloomberg found—exceeding the national standard and eclipsing even Habler’s 30%.

City officials have said studies based on condos’ actual sales aren’t valid for measuring the quality of their work. They rejected any comparison to the previous scandal, saying “assessors are dedicated public servants who follow the law and hold themselves to high standards.”

The investigation that swept up Habler and others centered on commercial property, but it gave rise to a full city review in 2002 that criticized New York’s process for valuing various types of real estate. A resulting report that recommended several changes cited a “high degree of subjectivity” that created an environment where “opportunities for corruption abound.” Some adjustments were implemented temporarily; many, including recommendations aimed at reducing subjectivity, are not in place today.

The 2002 report wasn’t the first attempt to overhaul New York’s system. In 1993, a mayoral commission found that New York’s system was inherently unfair and benefited people with higher incomes. Most recently, in 2018, Mayor Bill de Blasio and City Council Speaker Corey Johnson announced another panel. It issued a preliminary report in January 2020 that recommended valuing condos and co-ops like single-family homes, using the sales approach. The latest commission has yet to issue a final report. Its recommendation would require state legislation; none has been introduced.

A spokesman for Eric Adams, the Democratic nominee and favorite in next month’s mayoral election, said Adams is a “supporter of reform” but didn’t respond to repeated requests for comment on the findings in this article.

Some taxpayers have turned to the courts. A group of civil rights organizations, community activists and high-end rental-apartment developers has sued the city and state to try to force changes in assessments. The group, Tax Equity Now New York, or TENNY, alleges that city property taxes are both unfair and racially biased, claims that city and state officials deny. The plaintiffs won in a lower court, but the city and state prevailed on appeal last year. In August, TENNY asked the New York state’s highest court, the Court of Appeals, to hear the case. The court’s decision on whether to hear the case is pending.

Prior efforts to improve the process haven’t resolved a fundamental problem: Assessors’ values for lower-priced condos represent larger shares of the condos’ actual market prices than their values for higher-priced condos do. That pattern slices millions from the bills of the wealthy and sticks the not-so-wealthy with the tab—though the outcomes differ somewhat from borough to borough. In Manhattan, Queens and Staten Island, such low-end valuations are roughly twice as high, relative to market price, as valuations for the highest-priced condos. In Brooklyn, they’re 75% higher and in the Bronx, they’re 63% higher.

These disparities are rooted in an inscrutable passage in state law that has prompted city assessors to spend much of their time coming up with hypothetical numbers.

Section 581 of the New York Real Property Tax Law says, in essence, that assessors can’t set the value of any condo or co-op higher than it would be if the property were not a condo or co-op. In time, state courts interpreted the law to mean that both types of property must be assessed “as if they were conventional apartment houses.” That interpretation required assessors to use a different approach.

Most U.S. residential property is valued for tax purposes on a “sales” basis; assessors study recent sale prices as guides. But rental apartment buildings are valued on an “income” basis, meaning assessors determine a market value for the income each building produces.

In transferring that approach to condos and co-ops, which generally produce no income, assessment officials have to create hypothetical, on-paper-only income figures for them. For each condo building, this process begins when assessors choose as many as three rental properties as “comparables” and find the income that their owners have reported in mandatory annual filings.

In most cases, Bloomberg found, assessors then change the comparables’ income numbers completely. City officials declined to describe their process in detail, but records show that in case after case, assessors used different values for the same comparable’s net operating income.

In 2019, a stout brick rental building at 433 West 21st Street in Chelsea was used to help value 20 nearby condo buildings, but officials used different income figures in each case, ranging from $1.9 million to $3.4 million. None of them matched the net operating income that the owner of 433 West 21st Street reported to lenders that year: $1.2 million.

Note: Examination of comparable rental income data.

Data: New York City Department of Finance

Overall, the city’s changes to the income figures don’t correspond with actual market prices of the condos they’re used to value, Bloomberg’s analysis found. Instead, the data show that as market prices increase, the average amounts that assessors use remain flat. In other words, assessors have used relatively higher incomes to value low-priced condos and relatively lower incomes for high-priced properties.

Note: The gray dashed line, labeled ’Accurate Valuations,’ represents where values would fall if the city’s net operating income (NOI) estimates perfectly matched market prices. Each dot represents the value derived from a comparable rental’s NOI estimates for a condo that sold. The black line shows the average market values resulting from the city’s NOI estimates. For more details, see the methodology.

Data: New York City Department of Finance

“It’s completely bonkers, and the result is most likely regressivity,” said the University of Chicago’s Berry.

City officials declined to discuss how they choose comparable rental buildings, but many go unchosen. In 2019, officials used only about 5,000 out of roughly 24,000 possible choices to help value more than 185,000 condo and co-op properties, city data show. Assessors sometimes use the same piece of rental property to help value more than 100 different condo or co-op buildings, changing the rental’s income figure dozens of times.

Officials say they have to adjust the income figures to ensure appropriate comparisons. But their changes go beyond mere tweaks, raising questions about the comparisons’ validity.

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A rental building at 315 Central Park West is listed in city tax records as earning $1.5 million in income in 2018. When assessors used it to help value 200 co-ops, they changed the income number 191 times. The average figure they used was $3.2 million, more than double the original amount. The highest was $4.5 million.

Assessors used 468 Riverside Drive to value 208 properties in 2019, changing the net operating income 202 times. Values ranged from $821,000 to nearly 4x that amount.

A Forest Hills rental pulled in $844,000 according to tax records in 2019, but had net operating incomes of as much as $1.5 million cited for assessments—many of which were in far-flung Beechhurst.

A narrow 6-story walk-up in Chinatown rents most of its apartments for under $2,000 a month, but its been compared to roomy Soho lofts and luxury Tribeca buildings with units that sell for millions.

Across the city, a relatively small number of rental buildings have their financials adjusted differently for nearly every condo or co-op they’re used to appraise. Here are all the ones used over 50 times.

Note: Summary of comparable rental income for condos and co-ops.

Data: New York City Department of Finance

The 2002 report on overhauling New York’s property tax system recommended that assessors stop producing their own income estimates and instead use widely available market data for them. But city officials said in response to Bloomberg’s questions that the available market data “is not adequate for valuing the variety of income-producing properties in NYC.”

Regardless of the data source the city uses, several experts criticized the city’s lack of disclosure on how assessors calibrate their adjustments to the income figures—or precisely how they use the adjusted amounts to arrive at a hypothetical net operating income for each condo building they value.

“At this point, the results are so absurd that they need to be more transparent about the adjustments they are making,” said Mark Willis, a senior policy fellow at New York University’s Furman Center, who has advocated for assessors to value condos and co-ops based on sale prices. “I don’t think there is anything malicious going on here. They aren’t doing this intentionally. So something is going on, and it needs to be addressed.”

Once they’ve generated a hypothetical income stream for each condo building, city assessors still have to figure out how much that stream is worth. To do so, they use another number that bears little resemblance to real-world conditions, Bloomberg found.

Real estate investors have long used a relatively straightforward ratio to measure the market value of a property’s income. In its simplest form, this ratio, called a capitalization rate, or “cap rate,” is calculated by dividing the annual net operating income by the property’s current market value.

New York’s assessors use essentially the same calculation. They have the income numbers they’ve generated, so if they divide each one by a valid cap rate, they could arrive at market values.

But the cap rate they use is far from valid, Bloomberg’s analysis found; it’s more than double the rates found in local real estate markets, a choice that wipes out billions of dollars of taxable value at a stroke.

Note: 3-month rolling averages

Data: Real Capital Analytics data compiled by Bloomberg

The higher the cap rate, the lower the resulting valuation.

Consider:

Note: City cap rate average for fiscal year 2017-2019 computed using city’s net operating incomes and estimated market value.

Data: New York City Department of Finance, Real Capital Analytics

“If you tried to sell me an apartment building at a 12.4% cap rate in New York in the current environment I would wonder what was wrong with the building,” said Jim Costello, senior vice president at Real Capital Analytics, a real estate data company. Using such a high rate grossly undervalues property in New York, he said.

City officials provided only a smattering of documentation on how they devise their cap rates, saying they use a method that was developed in the late 1950s. But one reason for the extra-high cap rate is clear: In constructing it, city officials attempt to account for the prior year’s property tax payments. To do so, they add an estimated effective tax rate of 5% or more onto their cap rate—an estimate that’s wildly overstated, according to Bloomberg’s analysis. On average, New York condo owners pay an effective rate of 0.5%, more than 10 times lower.

That 0.5% rate means condo owners, on average, get a better deal than rental building owners, who pay 0.8%, according to Bloomberg’s analysis. New York officials value rental buildings twice as high, relative to their sale prices, as condo buildings, the analysis found. That shifts more tax burden onto rental properties and, by extension, onto renters. Moreover, because city sales and assessment data show that rental properties’ valuations also lead to regressive taxation, low-income renters can be hit particularly hard.

It’s “a hidden tax on renters,” says Jay Martin, executive director of the Community Housing Improvement Program, which represents landlords of New York’s rent-stabilized properties. Each year, the city mandates a limit on rent increases in roughly 1 million apartments in such properties.

Property taxes often push those limits higher. Over the last 17 years, landlords’ tax bills rose to make up roughly 30% of their costs, up from 22%, city data show. During the same period, the median stabilized rent in the city’s oldest buildings increased 79% to $1,364. “God willing, one day, elected officials will understand there is a direct correlation between property taxes and rent,” Martin said.

Rentals pay a higher rate than condos

National standards and New York state law say they should be treated the same

That correlation affects minority groups disproportionately because more minority households rent their homes. Only 11% of Hispanic New Yorkers and 30% of Black New Yorkers own their homes, according to a 2018 survey conducted by the City University of New York’s Institute for State and Local Governance. For White New Yorkers, it’s 42%.

By now, experts say, an implicit expectation of unfair taxes is built into sales prices for New York real estate, making the chance of repairing the system remote. If its flaws were corrected overnight, billions of dollars in value would disappear from high-value properties, experts say, triggering potentially tectonic shifts in the market.

“It would be a huge wealth transfer, and that’s where I think the real obstacle to reform comes from,” said Berry of the University of Chicago. “There is a loud and clear message for places that are not New York: Get a handle on these problems before you reach the point New York has reached.”

How a $2 Million Condo in Brooklyn Ends Up With a $157 Tax Bill

New York City grossly undervalues condos

Inaccurate valuations distort tax bills

City systematically undervalues expensive properties, overvalues low-priced ones

Estimating income for condos drives regressivity

Rentals pay a higher rate than condos