Do You Know Anyone Who Finished Renos In 2012?

Yesterday was the day that the Department of Finance released the tentative property tax valuations for the coming year. Our valuation went from $333K to $1.91M. That means our property taxes are going from about $3,500/year to something around $21,000/year! [Why does the City seem to want to punish people for improving their communities? I mean dealing with DOB is a nightmare, and now this…]

The way it’s supposed to work is that the amount of improvements to the property is added to market valuation of the property. Normally DOF is limited in how much they can jump your property taxes, but when you do substantial improvements that is the one time they’re allowed to bump the taxes up substantially – but only by the amount of improvements to the property.

If I understand things correctly they threw out the PW3 Cost Affidavit that we submitted to the Department of Buildings and instead used the number $1.46M which their appraiser appears to pulled out of thin air since it’s nothing close to the actual cost. Mind you, “cost” is one of those things that’s a bit flexible and open to interpretation since what you report to DOB is “hard costs” which don’t include everything you spend money on. But it’s not like we’re arguing over small amounts that might be due to the interpretation of “hard costs”. There is just no reality in which we could have spent $1.46M – we simply didn’t have access to that kind of money.

The reason why I’m asking in the title of this post whether people know of other people who completed their jobs in 2012 (and possibly even late 2011) is because I suspect there’s a problem assessor covering Central Harlem. 104 West 120th had an assessment last year of $262K. Their PW3 cost affidavit was for $315K and the assessor gave them a market valuation of $1.5M – so she’s in the same boat we are – it’s just the change isn’t quite as drastic as ours.

If a bunch of us can all band together and go to DOF together, then I think our individual cases will be strengthened and it will seem like the problem is with the assessor. If you know of anyone who might be in the same situation, please have them contact me – jay@beatingupwind.com. I’ll be happy to look up their particulars if they don’t know how to find them. And if you just know the address for buildings that had completed projects last year, please put them in the comments below and I’ll look them up and contact the owners if appropriate.

Update (Jan 21st):

In researching the situation – looking for other places that completed their work in 2012 – I discovered that it’s also affecting some of the folks who haven’t gotten their jobs signed off yet..

There’s a place on 136 that filed a preliminary cost estimate of $50,000, but they’ve had about $650K added to their market value by DOF before the renovations are actually completed. Their taxes will just about triple because of that – not as bad as our case, but they’re probably going to have more added next year when they complete their renovations.

But that’s nothing compared to what’s happening to 241 Lenox (which has also not completed their renovations yet)… They filed cost estimates totaling about $850K. The assessor has raised the market value on that place by $650K which doesn’t seem like a horrible thing on the face of it, but the problem is the tax class was not changed. So their tax bill is going from about $13K/year to a whopping $56K/year. I think they’re doing 2 family plus commercial. I don’t know if that qualifies for tax class 1. If it does, then keeping them at tax class 2 is just spiteful. It’s adding $40K to the cost of their renovations.

24 thoughts on “Do You Know Anyone Who Finished Renos In 2012?

  1. Ummm…I’m hoping you’re wrong b/c if not, we’ll be in the same boat – but it’s my understanding that there is a 6% per year/20% over 5 years limit in increases – I wasn’t aware that that doesn’t apply if you’ve done renos — how else would your value go up by more than 6% year to year, without improvements? Hmm. I looked at mine online and it says we’re limited by the 6/20 rule…I hope you are as well?

  2. That is very concerning… we are also in the middle of a major renovation on a brownstone where we are changing the CofO (in Brooklyn). Please let us know what you find!

  3. Jay – How did you get to $21k? It looks like your assessed value for tax purposes is $115k. I believe this would be multiplied by 13.433%, which implies approx $15k. Still sucks, but not as badly as you indicated.

    I agree with you – this is completely crazy. I own a house in Central Harlem and was considering buying a shell to rehab. The potential tax issues related to a renovation are a major stumbling block for making this investment.

    Good luck on this.

    • Peter – the tax rate for class 1 (1-3 family) is a bit over 18%, not 13%. Tax class 1 enjoys an assessed value of 6% instead of 45%, but the tax rates are higher.

      • Got it. A couple of thoughts on next steps:

        1. Find a decent tax certiorari to help you fight it out. A number of local law firms do this type of work.

        2. Go back to the 2005 NYT article on this matter and track the names back to the properties each Person owned. Based on the NYC DOF site, you should be able to identify which people, if any, we’re successful in reducing their taxes. Reach out to the ones who made progress…

        • Peter – On #1, our real estate lawyer (who we’ve used for 15 years and LOVE) referred us to his favorite certiorari lawyer. I’m just trying to collect data on other people going through something similar. If he can point to other cases where the assessor is not following DOF rules it should make our case stronger.

  4. I checked the first owner listed in the 2005 NYT article – looks like they got their tax increase partially reversed. I bet the others did too. Happy to show you how I did the research. Though you are pretty savy, so I’m sure you already have it figured out. Email me if you like.

    • The 2005 NYTimes article you’re referring to is largely about 4+ family properties. There’s another article in the Times a few weeks after the first one where they fixed/improved the problems for 4-10 family buildings.

      The problem we’re facing is a different one. Our problem is that they think our renovations cost over $1.4M (in hard costs – so probably well over $2M in actual costs). That’s a very different problem than was faced in 2005.

      Anyway, we’re getting a lawyer involved who specializes in property tax issues. It’s just frustrating that the City penalizes people for fixing up blighted buildings.

      • I believe the issues are essentially the same – overlapping at minimum.

        The common issue is the appraised value pro forma for any renovations. Take a look at the DOF website for the first property covered in the 2005 4-family brownstone article (search name in acris, then address / block & lot on DOF). The available records go back to 2005, so you can see the chronology…

  5. Since you’re in tax class 1 you will benefit from the state law cap of 6% per year or max 20% over 5 years, moreover as property assessment fluctuates in the years to come your future RE taxes will never come down due to the large spread between market (1.9MM) and assessed (111K) values until these two extreme points converge, meaning either the market crashes spectacularly or the cap has been fully phased in. That said, your property taxes will NOT jump to 21K as feared since you’ll be cushioned by the 6% cap in 2013. Your prelim tax assessment letter doesn’t take into account any adjustments yet because there had been none, when you get the tax bill, you’ll see the 6% cap.

    In addition to Market Assessed Value, the city also has something called Transitional Assessed Value specifically for tax class 2 with 10 units or more and tax class 4, neither which is you. Under these classes the full value of improvement doesn’t qualify for phasing. See more here – http://www.nyc.gov/html/dof/html/property/property_val_assessment.shtml

    • Jacquie – the 6-20% limitation doesn’t count on renovation costs. Renovation costs are the one thing that can make the taxes you pay jump way up.

      And $114K is 6% of $1.91M (you’re confusing market value and assessed value – Assessed Value is 6% of Market Value for 1-3 family buildings, 45% for other buildings).

      That means this year we’ll be at the full maximum taxes we could possibly pay – $21K/year. Yes, if our market value later goes to say $3M, we’ll enjoy the 6-20% limitation, but at $21K/year in taxes already, “enjoy” isn’t really the right word.

      • Here’s the DOF history for my brownstone (class 1 base) w/o exemptions taken into account:

        2007 – market value 520K vs 9.2K assessed
        2008 – mv 686K vs 9.9K assessed
        2009 – mv 1.53MM vs 23.8K assessed
        2010 – mv 1.41MM vs 40.9K assessed
        2011 – mv 1.62MM vs 41K assessed
        2012 – mv 1.67MM vs 41.7K assessed
        2013 – tentative mv 1.69MM vs 44.2K

        From the first year of ownership to the present my RE taxes when from approx $1500/year to over $6000 based on the figures above,, and property tax rate went from around 12% to almost 18% if I remember correctly . As you can see my market value went up like yours for the same reason due to a gut rehab completed in 2008 but the 6/20 put a cap and phased in the increase and I wasn’t faced with a jump from 2K to 14K from one year to the next.

        • I wish DOF were doing to us what they did to you. Instead they’re claiming the entire increase in value is our renovation cost. That’s just wrong. You were handled correctly, we weren’t, which is why we have to fight it.

          • Perhaps a better way to frame the issue at hand is what happens to the assessed value basis when a property changes from class 2 to class 1 . This same issue didn’t apply to me because our house was never in class 2 (aka SRO) and the DOF used the same basis value carried prior to renovation , thus we went from 9.9K to 40K spanning 3 calendar years.

            I think the same gradual treatment would have applied to you as well had you maintained class 2 tax and be subject to 8/30 cap. Ironically your taxes for 2013-14 would be much less if you completed the renovation but hadn’t changed the C of O . Your new assessed value would be somewhere around mid 30K instead of over 110K

            You should look into brownstone properties where former churches used to be as those went from tax exempt to single family. I’m hard pressed to think the DOF doesn’t already have precedents in dealing with this sort of issue.

  6. Good Morning Jay,

    Do you know an attorney who specializes in 203K loans, or contractor was paid in full and still took a lein on our house
    We just completed our rehab in June of 2012
    Thanks

    • This is off topic for this post, but something I should do a blog post on as we’ve been through it twice now.

      There’s really no connection between the 203(k) loan and the lien unless the bank is not giving you your holdback because the title isn’t clean. But if the contractor has been paid in full, I’m guessing that’s not the case.

      There are a few ways to approach the situation.

      1) Go to a bonding agent (we use Elmer Hyde Agency and like them) and put up 110% of the lien amount. At that point you’ll file paperwork and the lien will be discharged and your title will be clean. The contractor will have 7 years from the date they last did work for you to sue you. However, the bond will be released after two years if they don’t bring a lawsuit (or after a year if they fail to renew the lien).

      2) File a show cause hearing. Chances are the bank required the contractor to sign a lien waiver. A show cause hearing will make him prove that he has grounds for a lawsuit. That will be difficult for him since he signed a lien waiver. Without grounds the lien will be discharged. Corporations are required to hire lawyers. If you own the building personally the lawyer is optional – you can file the paperwork for the show cause hearing yourself and represent yourself in court. There are people at the court who’s job it is to help pro se defendants/litigants with the paperwork (but they don’t give legal advice).

      3) The last option is to do nothing. If having an unclean title isn’t a problem for you (e.g. you don’t need to sell, refinance, etc.), you can just sit and wait for the contractor to sue you.

      As far as lawyers, our lawyer, Bernd Allen, doesn’t do litigation, but people in his office do. He’s been our real estate lawyer for 15 years and we trust him completely. His contact details on my recommendations page.

  7. Could there be confusion between what was actually spent on the reno and what the tax assessor valued the house at? I believe it is the incremental value added that drives taxes, not the actual money spent. We had this same problem when we did work some years ago. We simultaneously changed from a Class 2 to a Class 1 property and our taxes fell, but not by very much. The culprit was the assessed value jumping (well past the periodic caps).

    The amount spent on work is notoriously underestimated. I thought that this was to minimize filing fees which may be linked to how much you expect to spend. But the City knows this and won’t rely on what you said you spent to drive any increase in tax calculations — that would be moral hazard. While you might be able to fight it, I think the criteria is simply market value in the neighborhood. Won’t it be hard to argue that the building isn’t worth $1.9 mm given what houses in the area are now selling for?

    • Jonathan – What you describe is what the assessor did – he took the value the renovations added to the property and added it to our assessment. Thing is, in talking with a lawyer who specializes in property tax issues as well as a non-lawyer who specializes in helping people file appeals for property tax issues, both say that only the cost of the renovations should be considered according to DOF rules. One said that both soft and hard costs should be added to the assessment. The other said that only hard costs (as filed with DOB) should be used unless the assessor believes the PW3 to be a complete fabrication.

      Another way to look at it is that at the same time we were doing renovations the market was going up. Only the cost of the renovations should count against us. The market appreciation is supposed to be limited by the 6-20% rule. They acted like all the appreciation in our property was due to renovations and didn’t acknowledge that the market has been going up.

      • I once heard Attorney Peter Blond speak at a Brownstone Revival Committee meeting. His practice is entirely tax certiorari work and he really knows his stuff. I found him very approachable and will give you an honest assessment of your chances to get your taxes reduced. He may be worth a call.

        Peter Blond
        Brandt, Steinberg & Lewis LLP
        212-563-2200
        pblond@bsl-taxcert.com

  8. Jay – what is your Effective Market Value? Did this end up at 1.91m?

    We finished our renovation (Brooklyn) in 2012 and got the notice as everybody else as well. Our new market value is now 1.299m, but effective market value is at 499k. From 499k * 6% * 18% I expect to pay around 5400USD in the new tax year.

    It is on my to do list on following up on this to understand the long term implications, understand the property tax logic (if one can be fund) and work out if we should appeal by March 15th. Now I am seeing your post and this becomes more urgent…

  9. They got me!! When I was posting earlier, I was just a concerned onlooker. I just received a revised assessment in the mail and my taxes are going up into the mid-$20K range.

    I’m open to dedicating time and resources to disputing the DOF. Let’s discuss how we can help each other.

  10. While doing some research i learned that you can only challenge your assessed value of your home with tax commission office and if your home falls under tax class 1. You have until march 15th to file. And it has to be worth less the effective market value.

  11. We are owners of a house not yet in its ideal state. We’re considering various renovation scenarios. I’ve received some conflicting advice about the consequences for assessed value of undergoing a CofO change and/or tax class change. It seems there is substantial risk involved. I am curious as to whether Jay and the other people in this chain ever reached resolution with the DOF.

    • The issue is that if you want to rent a portion of your building, what you rent must match the C of O. If you don’t want to rent out parts of your building you’ll still have problems when you go to sell if your C of O doesn’t match your use since your buyer’s bank will want them to match.

      My understanding (and I may be wrong) is that it’s not that you changed your C of O that changes your assessed value, but whether you spent 50% of the value of the building on the renovations. There’s the assessed value and what used to be called the transitional assessed value. Basically your assessed value is whatever it is, but the City is limited in how much the taxes you pay can go up. Hence the “transitional” idea (whatever people want to call it). AFAIK, the taxes can only jump if you spent at least 50% of the value of your home on the renovations.

      So, my advice is do as much as possible under “repairs and maintenance” and then do a smaller Alt-1 job which changes the C of O. But changing the C of O isn’t optional – it must be done. Old school people will say it’s optional – and they’re the ones paying huge settlements to renters when they get caught.

      In our case (described above) the new assessment was too high. We appealed. The appeal was denied. We then sued the City at which point DOF sat down with our representative again and they City offered about half the reduction that they should have offered. We’ve rejected that reduction, so now it’s back to the lawsuit and another year of appeals. It’s crazy that you have to sue the City to do their job properly, but that’s what it takes.

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