We all live in this co-op, and one of us will be financially murdered

But first, let’s meet the victim(s), since what is a good juicy newspaper story (in this case, from the New York Times) without a victim?

I’m the shareholder, and I’m about to be victimized

Co-ops across the city have raised their maintenance charges by as much as 15% in recent months, and one of the main causes is rising property taxes.

What is … Professor Property Taxes, with the tax bill?

Just cal me … Professor Property Taxes

It’s true that Professor Property Taxes was found in perilous proximity to the precipitous payments:

Board members and building managers say that while maintenance increases averaged only about 5% last year, many co-op buildings are now dealing with double-digit increases.

“Operating costs have gone up, but property taxes have skyrocketed,” said John Janangelo, the president of Bellmarc Property Management, which manages about 50 apartment buildings in Manhattan. He said that taxes for some of his buildings had risen by as much as 35% in 2009.

But I’m a property manager, not a suspect!

But we have to eliminate the property taxes as a suspect, for they are the product of prices that have been … pushed?

Property taxes went up at the start of the year when the city eliminated a 7% homeowner tax cut initiated in 2007, when the city was on better financial footing. But there is another reason for the increase. Buildings whose property values soared in recent years are experiencing even bigger tax increases because the assessed values of their buildings have gone up.

Could it have been … Mrs. Peaking Prices?

Previously pulchritudinous?

As we’ve seen, cities use property assessments as a leveling device, aiming to distribute the real estate tax burden ‘fairly’ among all property owners.

“Assessments have gone up based on last year’s market,” said David Kuperberg, the president of Cooper Square Realty, which manages about 200 co-ops and condominiums. “And that’s like kicking homeowners while they’re down,” he added, noting that assessments often take a while to catch up to the market.

Naturally, it goes the other way too – when people’s condos and co-ops were rising in price and their assessments were lagging, nobody complained then.

Might it be … the co-op treasurer?

Money is my mantra

Marty Hoffman, the board treasurer of a 106-unit co-op on West 89th Street, said that the assessed valuation of the building had gone up every year in the last five years for a total increase of 107%. The property tax bill has gone up 55%, from $369,000 in 2004 to $574,000 in 2009. Taxes this year alone went up by $83,000, or roughly $783 more annually for each tenant shareholder.

Now, if the assessments are all rising, then the city should be able to lower the tax rate, because otherwise the city’s operating budget would be expanding dramatically, and that wouldn’t be right, would it?

We’re in danger of running red with scarlet ink

Because each year’s higher assessment is phased in over a five-year period, Mr. Hoffman’s building faces at least four more years of hefty assessment increases as the increases that were issued when the market was booming continue to kick in.

Mr. Hoffman said cheaper fuel was the only reason his building had been able to limit its annual maintenance fee increase to 7.2%. “If oil prices hadn’t dropped, we would have been faced with a 15% increase.”

What’s driving up the taxes? Might it be the City of New York?

I’m from the City and all we do is raise your taxes

[In] Robert Berliner’s 277-unit building on Sutton Place, property taxes were just under $3 million last year and represented the single largest expense in the building’s $7 million budget.

Mr. Berliner, who is the co-op’s board treasurer, said that the city raised the building’s assessment by 25% in 2008, but the building challenged the increase and got it reduced to 10%.

Except that the city’s raising of assessments is no recent phenomenon, but a multi-year trend:

Mr. Hoffman said that even though the tentative assessment increase for 2009-10 was only 1%, the building may have another tax increase of about $83,000 next year because of the phase-in of previous assessment increases. “Aside from the run-up in oil prices,” he said, “nothing has gone up as fast as real estate taxes.”

Is the culprit the previous price appreciation that occurred several years ago?

Some operating costs have risen, however. Richard Montanye, a partner with the accounting firm of Marin & Montanye in Port Washington on Long Island, which works with hundreds of buildings in the city, said that water and sewerage charges went up 14.5% last year. “Housing costs in the city in the past four to five years have far outpaced inflation,” he said.

That’s the period in which prices were rising.

At the same time, some revenue sources have been drying up for many buildings. Those with commercial tenants, especially retail outlets, have been hit hard by the recession, with many tenants asking for rent reductions because their sales volume has dropped off significantly.

Might the real culprit be … the recession?

Are retailers are being bled … White?

We forget that in densely settled urban environments, the ground floor space is not only the least desirable housing accommodations – would you want every passer-by peeking in your windows? – but also the most desirable retail space. Many a building took advantage of this dynamic to lower their own occupancy burdens by profiting from the rents they charged their retail tenants.

Which works for a while …

“Retail tenants are all hurting,” said Richard Siegler, a lawyer who represents about 150 co-ops, “and they’re all coming to boards and asking for relief. If the economy improves, then a lot of this will go by the by, but if not, then boards will have to contemplate losing tenants, even though they’d rather not have a vacancy.”

Um … the boards will have to contemplate lowering the rents.

Lower the retail rents?!?

Buildings that in a stronger market relied on income from flip taxes — a sort of transfer fee for each sales transaction — may also struggle now that sales volume throughout the city has been reduced to a trickle.

‘Flip taxes’ are yet another bit of fine-print extraction from co-op shareholders. As the Times explained it back in the halcyon days of 2003:

When the costs of operating and maintaining a co-op building increase, there are two basic ways of generating additional cash. One is to increase monthly maintenance fees; the other to impose a building-wide assessment.

Since neither solution is likely to endear a co-op board to its shareholders, other strategies for raising money are often sought. One such strategy is the imposition of what is known as a ”flip tax,” whereby shareholders who are selling their apartments are required to pay a sum of money for the privilege of doing so. Flip taxes can range from as little as a couple of thousand dollars to as much as tens of thousands of dollars depending on the way the tax is calculated and the amount of the sale.

And while flip taxes are only slightly less unpopular than maintenance increases and assessments, co-op lawyers say that an increasing number of co-op boards are now considering proposing flip taxes for their buildings.

Thus ‘flip taxes’ – which are really an intra-shareholder transfer fee – are simply a means whereby the incumbent group of shareholders take a bite out of anyone who actually sells his or her shares.

This for all who fail to pay their flip taxes!

Private living clubs like co-ops are the only form of ownership that can readily whack their members this way, and the flip taxes thus represent yet another factor why co-ops sell for less than comparable condos.

You want to live in the same building we do? Pay up!

Robert Berliner’s 277-unit building on Sutton Place has a 2% flip tax for outside buyers, which he said “was a pretty significant source of revenue in 2006 and 2007.”

In other words, as prices were spiraling upwards, the members who didn’t sell were able to subsidize their own occupancy costs by taxing those who sold. Wonder how many of them realized what they were doing?

And the beauty of it, Colonel Mustard, is that Mr. Green pays for you!

The building had used that income to meet operating costs, but because there are now so few apartments changing hands in the building, the board has shifted its flip tax revenue into its reserve fund. “We’re trying to be more realistic and more conservative in dealing with our budget,” he said.

Is that conservative and realistic?

Mr. Berliner said that because real estate taxes are so high for the building, the board may consider raising the flip tax to 3%.

Yes, that’s a good strategy — when the real estate market is weakening, let’s increase the barriers to resale!

You dare to raise the flip taxes?

Who’s the culprit here?

I’m the shareholder, and I’m dead

Maybe it’s not so much Clue as Murder on the Orient Express?

Who dunned it? Or who didn’t dun it?

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From the Unintentional Humor Department of the New York Times comes this What-are-we-going-to-DO-about-this? story about new parents who are shocked, shocked to discover that where they live isn’t where they want to send their children to school:

Any good private schools around here?

For some young families who bought during the housing boom, having it all meant an affordable brood-sized apartment in possession of a good public school zone.

That’s always been the American dream; what makes this lede so funny is the presumption that only boom-buying households would have had school systems on their mind. 

But other parents in pursuit of real estate never even thought about schools. They assumed they would send their children to private school, often because they too had followed that route.

Born with a silver spoon?  Now that we’ve unwittingly established our focus characters’ Marie Antoinette credentials of oblivion, let’s press on.

Can you believe we’re going to have to move to get away from all yucky guillotining going on in Paris?

That was before the economic crisis. Now, as many would-be private school parents scramble for a good public school, there is a despairing recognition that in this respect, geography is destiny: With odds of being accepted into a popular school in another zone slimmer than ever, they either live in a neighborhood with a decent elementary or they don’t.

Suddenly these property owners care about neighborhood.  That should be a good thing.

Paying your property taxes?  It’s a good thing

As I’ve posted before, I’m convinced that a signal strength of the US housing finance ecosystem is its three levels of government, combined with local autonomy over the local budget, including public schools as a principal local responsibility.  That focus on local accountability for our children turns the richest inhabitants of a city or town into its most concerned citizens.  There’s a straight route from the PTA to the school committee to the city council – and that pathway grows new generations of civic leaders every five years or so, contributing to the vitality of local housing policy innovation.

Renters and first-time buyers are in the best position to light out for better school zones with their young offspring.

Another benefit of a permanent professional rental sector – households with economic and demography mobility also need tenure and consumption mobility.

Meanwhile, landlocked owners — unable or unwilling to sell in a down market or to spend around $33,000 a year to send their child to private school — are panicking.

Thirty-three kay a year?

How much extra is a place in the right New York City school district worth? 

Using $33,000 annually as the cost of sending a child to private school, let’s assume that the home or condo owners are in the 25% effective tax bracket, so that $44,000 in pre-tax mortgage interest costs them the same as $33,000 after tax.  (Actual New Yorkers are almost certainly in higher tax brackets than that, particularly when state and local taxes are factored in to the Federal rates.)  Now, at an 8.0% cap rate/ Weighted Average Cost of Capital (which is higher than typical cap rates, but probably realistic in today’s credit-constrained environment), that means as much as $550,000 in house price differential per school-age child.

[Technically minded readers may object that the child will not be school age indefinitely, and therefore that a discounted present value would be better. 

I recommend discounted present value

Those readers are technically right --- that's what technical means – but the loss is not as great as one might think.  To begin with, even if I want to move out because my family no longer has school-age children, whomever I sell to may have the kids, so the benefit could be evergreen. – Ed.]

What can you do if you bought in what is now the ‘wrong place’?

That’s called ‘being in the wrong place’

Trapped by their real estate, these parents are swallowing a bitter pill –

You mean I could have made more money?

– had they sold their apartments a year ago, their profits might have financed an entire private school education.

Life is full of regrets.

Some parents are considering renting an apartment in a desirable zone — at least for the time it takes to prove residency.  

Another example of how homeownership, beneficial though it may be, by reducing mobility can lead to over-consumption of housing by multi-housing families.

And some otherwise law-abiding parents plan to flout the system by establishing a fake residency in their school zone of choice.

Fake residency is just polysyllabic for fraud.

Just a few clicks

“I can tell you I hear it all the time on the playground — whether you’re moving or ‘moving,’ ” said Claudia Knafo, 47, a concert pianist and music professor who lives with her husband, Alexander Yagupsky, 44, and 4-year-old son, Joshua, on West 110th Street and Riverside Drive.

THINK AGAIN Claudia Knafo and her husband, Alexander Yagupsky, hope to send Joshua, 4, to public school, a change in plans dictated by the economy. To get Joshua into the right school, they may move.

She says her family’s situation is common in her neighborhood.

“We bought our apartment in 2004,” she said, “and like most new parents we never even thought about the public school zoning issues.”

Like ‘most new parents’?  All the ones I know and knew were consumed with choosing residence based in large part on the school system.

“We just assumed our son would go to private school.”

And didn’t put aside any money for it …

But when it came time to apply last fall, she and her husband, a music teacher, felt they could no longer commit to the expense because of the change in the economic climate. They applied to three private schools asking for financial aid, even though they were advised by other parents that this would undermine their son’s chances.

Well, yes.  Private schools are a business.  They have a student revenue mix. 

Please sir, my parents need me to win a scholarship

Financial aid is simply a device to disguise wealth and income surcharges imposed on their more affluent parents.

He was turned down by one and put on the waiting list at the others.

“At that point,” Ms. Knafo said, “we decided with the economy being what it is, we had to adjust our heads and think about public school.”

Which, say I the public school grad, is probably better for their child and for their community.  Now, all of a sudden, they care about municipal services.

Start practicing …

“We’ve noticed significant spikes in traffic to our reviews of good schools since Jan. 1,” said Pamela Wheaton, the director of Insideschools.org, a nonprofit Web site that provides information about the city’s public schools. For example, page views of information about P.S. 6 on the Upper East Side were up by 55% in the first quarter of this year from the last quarter of 2008. Views of P.S. 41 in Greenwich Village jumped by 59%, and P.S. 234 in TriBeCa by 44%.

After research that included speaking with parents from her neighborhood school, Ms. Knafo set her sights on two highly regarded schools in her district — P.S. 199 and P.S. 87 — and listed them at the top of the lottery form that parents of entering kindergartners were asked to submit by early March.

Results are due by early April, but Ms. Knafo doesn’t expect Joshua to get in because priority goes to children in each school’s own zone, and P.S. 87 already has at least 25 more applications from zoned children than it does seats, according to the Department of Education. As of early March, P.S. 199 had 189 applications from zoned students for 177 seats.

In other words, if you want the benefit of a good school, you should live in its vicinity. 

Would you send your child here?  PS 11

Their anxiety mounting, Ms. Knafo and her husband are considering selling their two-bedroom co-op and moving into a zone with a more desirable school.

“We actually had a Realtor come to our home, because I was completely hysterical about what to do with this smart kid I can’t seem to find the right school for,” Ms. Knafo said. “We bought it for $570,000 in 2004 and she said we’re back at 2004 prices, so we might not necessarily lose money on it.”

More likely, as with parents since the dawn of urban time, they will sell their condo, buy a smaller one in a neighborhood with better schools, and move there for the sake of their child.

Plan B, she said, is to sublet the apartment and rent elsewhere.

Not overconsumption, but an example of how rent stabilization leads to market distortions; without rent stabilization, apartments would be plentiful, and people like Ms. Knafo would have the intra-city mobility they need.

A schools consultant, Robin Aronow of School Search NYC, advised her that by historical standards her son’s chances of being admitted to P.S. 87 were good if the family established residency in the zone by June 1.

Tells you something about New York City that such a profession is sustainable, doesn’t it?

I don’t know what’s scarier, losing nuclear weapons, or that it happens so often there’s actually a term for it!

But Ms. Knafo worries that the rent from their apartment won’t cover the cost of a new one. The median asking price for a two-bedroom rental in the P.S. 87 zone is $4,200 a month; in P.S. 199’s zone, it’s $5,450, according to Streeteasy.com.

Okay, this is now a no-brainer.  You can spend $1,250 per month, $15,000 a year, more in increased occupancy costs, or you can spend $33,000 a year in increased school costs, or you can stay where you are and send your child to the local school.

“Basically,” Ms. Knafo said, “it’s like playing Russian roulette — are we going to have to pay for two apartments to get our child into the correct zone?”

Russian roulette is a game of odds; this is a simple toll.  You will pay or not as you choose.

You want our public schools?

“There are lots of people who are borrowing addresses or moving in with family. I personally am not comfortable with that.”

Honesty!  How refreshing!  Good for you!

A man who lives in the same school zone as Ms. Knafo says he is prepared to do whatever it takes to get his son into a preferred kindergarten.

When he and his wife bought their $1.6 million six-room apartment a year and a half ago, they had envisioned his alma mater, a prestigious private school, as the place to send their son.  

“I think it’s all part of the end of the wishful-thinking era, where you just think you’re going to grow into your expenses,” he said. “We’ve had successively bigger mortgages and we say: ‘It’s always a stretch. That’s all right; in a couple of years we’ll have more money.’ But now we’ve had to get a little more real.”

Evidently ‘getting a little more real’ doesn’t mean depriving themselves of their luxuries:

He and his wife both still have jobs and could probably scrape together the tuition.  But their financial optimism has dimmed.

So ‘getting a little more real’ means gaming the system:

How dare you call it cheating!

“I will certainly consider some alternative way to game the system by gaining a different address,” said the man, who asked to remain anonymous for obvious reasons. “This is my child, who is a really smart kid, and he’s not going to my crummy zoned school. That’s just not going to happen.”

Love your civic concern, fellow.

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In chess, the German word zugzwang (”compulsion to move”) describes a situation where a position is tenable but any move fatally weakens it.

Mutual zugzwang: the player to move loses.

To understand who’s in zugzwang, and why, we must take a stroll through budget arcana.

“I hold the passback and can hold it infinitely.”

The OMB passback.  Even before calendar 2006 begins, the Federal fiscal year 2007 (FY 07) budget cycle will start, with a Washington-insider event known as the OMB passback.

Before Congress can enact spending legislation, you see, it adopts a budget resolution — an agreement among the members of Congress as to how much they intend to spend in total for the upcoming fiscal year.  The budget is then allocated into spending caps for the respective committees, and under Congressional procedural rules, appropriations bills may move forward only if they are under the caps.  (In this Congressional spending is akin to Supermarket Sweepstakes.) 

“I’m terribly sorry, Madam Chair, your appropriations earmarks are over the spending caps …

so you don’t get any money, but let’s give her a big round of applause.” 

Before the budget can be adopted, it must be proposed by the President, roughly around the State of the Union Address.  So the Administration, like white in chess, always has the first move advantage.

And before the budget can be proposed, it must clear review by the Office of Management and Budget (OMB), which demands that each cabinet department or agency submit its budget request for OMB clearance.  OMB, after consulting with its economist wizard’s cabal, issues the passback, in which it reviews each agency request, line item by line item, and advises the agency what it (and therefore the Administration) will support, and what OMB will not support. 

Judge Roy Bean (tearing a page from a law book): “That’s a bad law.  I just repealed it.”

Agencies or departments receiving the passback have two choices:

1. Go along, grin sickly, be good soldiers, and support the passback.   OR


2. Fight the passback, in which case OMB will implacably oppose virtually everything the agency or department wants to do. 

Since OMB must sign off on just about everything a department does (Anti-Deficiency Act notwithstanding), including the issuance of regulations, in practice wise department secretaries learn to fall in line.

“Thank you sir, may I have another?”

The passback and the budget cycle.  In the pre-Cambrian era (before email), the passback was a hush-hush document (passed from hand to hand via bad photocopies and worse faxes), but in recent years the speed of e-leakery has so accelerated that all parties now tacitly treat the passback as effectively a public document. 

Thus the passback becomes a series of editorials: “Department, you asked for this, you have obviously erred, we are supporting that.“ 

Unlike CBO’s baseline, which must assume continuation of present law, the passback can loftily assume whatever it wants, including legislative change not even introduced.  If the President wills it, then it will be so (for passback purposes).

Slightly more comprehensible than the budget

The passback enhances political vaporware.  It can raise the stakes both by assuming a legislative change and then budgeting costs consistent with the change. 

Additionally, the passback comes out in late November, and the budget is not offered until early February.  That’s two and a half months during which the political vaporware sucks up lobbying oxygen, and where the political terrain, like Birnam Wood coming to Duninsane, moves in the Administration’s favor.

The passback and the tax proposal.  Will the passback include the tax-reform proposals?  I think it will, because, as I’ve previously posted, repeal of the Alternative Minimum Tax is too big to ignore, and too popular not to propose. 

So, if I’m right [We'll check you later! -- Ed.], the passback will propose tax reform (including AMT repeal) — maybe not the full-blown commission report, but several of its more substantial elements. 

The tax proposal and the FY 07 budget.  In January, legislators return to Washington for the 109th Congress’s second session.  What will they hear when the President delivers the State of the Union address?

They hear the President say, “I propose repealing the Alternative Minimum Tax.”  [Applause.]  “My tax reform proposal is fair, simple, and will grow our nation’s economy.”  [Applause.]

(See the benefits of political vaporware?  It can whiten breath even as it freshens teeth!)

AMT repeal and elected officials.  Now comes the extremely deft part.  To pay for the AMT repeal, the tax-reform proposal will do the following:

• Cap mortgage deductibility for millionaires.  (You wanna be against that?)


• Eliminate mortgage deductibility for second homes.  (Weeping for the fat cats yet?)


• Eliminate all tax incentives, or as it will be described, “close tax loopholes.”  (Find anything to oppose yet?)

So it’s the morning after the State of the Union, and the media are running stories about AMT repeal: “The AMT trap.”  “Who pays the AMT?”  (Hint: a lot of middle-class Americans.)

There will be wonderful graphics showing that in ten years, thirty million households will be in the AMT. 

(Horrors!  Economic pandemic!  An eco-demic!)

Someone will shove a microphone in front of Mrs. Elma Suggs, eighty-three years old, from Wet Blanket, Ohio, who has had to send additional tax to Washington because her charitable donations have thrown her — flung her — into the AMT. 

“It’s not fair!” cries Widow Suggs.  ”People who own big beach houses aren’t paying their fair share of tax.”  [Cut to picture of big beach house.]

You just let me know what part of that your elected official wants to oppose, okay?

Stakeholders and political zugzwang.  Now, you’re a current tax-code beneficiary (hereinafter a “special interest group” — ack!).  You’re well aware that many tax deductions are indeed loopholes (that is, your members don’t benefit from them) but your tax expenditure is a critical economic stimulus (that is, your members benefit from it).  So what do you do?

“What do you do?”

“Shoot the hostage.”

Remember, you cannot do nothing — you’re a lobbyist, for heaven’s sake!  You must lobby!

Welcome to political zugzwang.

So you do the following:

• Defend your program, and only your program, because that’s what you’re being paid to defend.


• Stop talking about anyone else’s tax expenditure — that’s for them to worry about.


• Rally your members to go see their members of Congress, and bring along the mother’s milk of politics, those campaign-contribution checkbooks.  (Because you don’t want to be left in the cold during the political endgame.)

In other words, high-grade political vaporware seizes the initiative, scatters opponents and puts them on the defensive, energizes the base, and fills the campaign coffers.  All this from purest vaporware.

Because it is vaporware, the Administration retains the further initiative to decide whether to invest further political capital in its pursuit.

Quality political vaporware creates political capital.  It is the Philosopher’s Stone of politics.

If, in the end, the reform proposal goes away … the Administration can bring it back again next year.

The most famous zugzwang ever: Samisch-Nimzovich 1923, White to move and lose

“If you can’t drink a lobbyist’s whiskey, take his money, sleep with his women and still vote against him in the morning, you don’t belong in politics.”

– Jesse Unruh, 1974

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