To the editor:
(re: “Getting lost in the bureaucratic funhouse of co-ops valuations,” June 30)
I would have found your recent Housing Block item to be funny if it wasn’t so horrendously true.
As president of the largest garden apartment co-op in New York, Glen Oaks Village, and co-president of the Presidents Co-op & Condo Council, we have been battling the issue of property tax calculations on Class 2 properties for more than a decade.
As an accountant, I long ago created the five steps of insanity that the city’s finance department uses to calculate assessed valuations on co-ops.
Your Housing Block brief did a great job in describing the process, now let me actually show you in layman terms how it is done.
It is a convoluted sausage-making process. But seriously, this is how it’s done.
• The finance department views your entire co-op or condo development as a “fictional rental property” that’s for sale. It then tries to figure out what an imaginary buyer would pay for it. That price will become the market value.
• In order to figure out the sales price of this “fictional rental building,” the finance Department has to determine its profitability. To do this, it fabricates financial statements by making up the annual rental revenue paid by nonexistent rental tenants, and then deducts the annual building expense that might have been incurred by the fictional rental building.
With this information — revenue and expenses — the city can calculate the “fictitious profit” that the “fictional rental property” never earned.
The finance department compares these numbers with limited information it has on “comparable commercial rental properties.” Since co-ops are not commercial rental properties, these “comps” are bogus.
• With the fictitious profitability calculation in hand, the finance department now tries to determine what an imaginary buyer would pay for the “fictional rental building” that generates this made-up profit.
• In an arcane and complex financial computation, the finance department arbitrarily decides a rate of return — capitalization rate — on the imaginary building’s profitability. The concocted result becomes the selling price or “market value” of your co-op.
• The “market value” multiplied by 45 percent is the “assessed valuation,” and the assessed valuation multiplied by the property tax rate — which is set annually — determines the property tax of your co-op.
As absurd as it sounds, that’s how it’s done. A system so complex and riddled with so many erroneous assumptions that few understand it. Hence, no one has fixed it.
So, don’t be surprised at the beginning of each year when the city’s finance department releases its assessed valuation of your co-op that it doesn’t reflect reality.