New York City’s property tax system, in place since 1981, faces mounting pressure for reform as litigation and legislative proposals advance. The combination of court challenges, government reports, and political debate has created a climate of uncertainty for commercial real estate investors, who must now factor the risk of significant tax changes into their decisions.
The city’s current property tax structure was established over four decades ago in response to earlier lawsuits about unfairness. However, the system’s flaws have become more pronounced with time, according to David Wilkes, a partner at Cullen and Dykman and a commercial property tax law specialist.
“The system that’s in New York City was created in 1981 because there had actually been litigation before that found the system was not fair,” Wilkes explains. “Over time, though, since 1981, that system has become unfair and has outlived its useful life.”
City officials acknowledge these issues. In the early 2020s, New York City released a comprehensive report outlining needed reforms, but no legislative action followed. Meanwhile, the advocacy group Tax Equity Now New York (TENNY) filed a lawsuit alleging the city’s property tax regime is unconstitutional and inequitable.
In a notable development, New York State’s highest court allowed the TENNY litigation to proceed, surprising many observers who expected dismissal. The case is now in the discovery phase, indicating the courts see the claims as warranting serious review.
The New York State Assembly introduced legislation last year aimed at correcting some of the system’s most criticized elements. However, the bill was withdrawn, leaving the issue unresolved. This legislative activity, combined with ongoing litigation and recognized system flaws, has increased volatility for property owners and investors.
“With all that going on, something’s going to happen. We don’t know exactly when, and we really don’t know exactly how the city is going to change things,” Wilkes says.
While reform proposals have focused mainly on the residential sector—including single-family homes, condominiums, and cooperatives—the process is highly political. It could have significant implications for commercial property owners.
“The changes could end up putting a much heavier tax burden on the residential class, and because this is always very political, it’s very likely that the legislature is not going to want to have to put heavier taxes on homeowners,” Wilkes notes. “So the legislature, I would imagine, is going to step in to try to redirect some of those taxes to the commercial class.”
For commercial real estate investors, the uncertainty surrounding property tax reform complicates both investment planning and risk assessment. New York City already imposes one of the highest property tax burdens on commercial property in the nation. Any shift in the system could further increase these costs.
“If I’m an investor in commercial property, I can’t look at the system and say that it’s a stable system,” Wilkes says. “I have to look at it and say there’s some real unknowns here.”
The city must still generate enough revenue to fund its budget, so any tax reform is likely to shift the burden among property classes rather than reduce it overall. Commercial sectors that could be targeted for higher taxes include office buildings, hotels, retail centers, and industrial properties.
Despite the uncertainty, Wilkes sees opportunities for investors who adapt their strategies. He emphasizes the importance of identifying asset classes that are more resilient to potential tax hikes.
“I think multifamily is going to continue to be a strong sector from what I’ve seen. I think the hotel sector still has a lot of demand,” he says, suggesting these categories may better withstand the impacts of tax reform.
Investors should also assess available tax incentives and abatement programs. The city offers various incentives for new construction and certain types of property conversions, including recent changes aimed at encouraging office-to-residential projects.
“The city has made some changes in the last year or so to things like conversions of office to residential,” Wilkes explains. “So there’s a program that addresses that, so part of it is just understanding how that works and whether it really benefits the project.”
The city’s assessment approach creates significant challenges for specific property types. Office properties, particularly Class B and Class C buildings, are often overvalued relative to current market demand.
“Clearly, office is a really rough category. There’s not that much interest in office, except at big discounts,” Wilkes says. “Unfortunately, there’s an awful lot of Class B and Class C office space that tends to be still very much overvalued.”
Even Class A office buildings face difficulties, as assessments frequently fail to account for the high costs of providing the amenities and upgrades needed to remain competitive.
The multifamily sector, while still attracting investor interest, faces regulatory pressures that could affect property values. Recent policy changes have increased operational challenges and costs for landlords.
“The city has made it very difficult to evict tenants that don’t pay rent, and now there’s a new mayoral administration that’s talking about rent freezes,” Wilkes notes. “None of that is good news if you’re an owner of that property.”
The uncertainty surrounding property tax reform occurs amid broader economic and population challenges for New York State. The state has led the country in net population loss, with over 200,000 residents leaving for other states each year.
“That’s certainly not positive and doesn’t help the economy,” Wilkes says. “It’s very much based on cost of living, and that includes high taxes.”
This ongoing demographic decline, along with possible tax hikes targeting affluent residents and businesses, could further weaken demand for high-end residential and commercial properties.
For institutional investors with significant holdings in New York City, the next two years present several significant risks: potential overhauls to the tax system, new or increased taxes targeting commercial properties, and continued population outflow due to high costs and tax burdens.
The dysfunction in the property tax system is not limited to New York City. Across the state, high property taxes have made economic incentive programs essential for new development projects. This reliance on incentives signals deeper structural problems that may require wide-ranging reform.
“Developers can’t figure out how they can ever make a profitable development without getting some sort of tax break,” Wilkes says. “That right there tells you that the system itself is not really functioning properly.”
While New York City is likely to remain an important market for both investors and residents, the current climate demands careful risk management and strategic planning. It is increasingly important for investors to distinguish between New York City and other parts of the state, as each faces unique challenges and opportunities.
The combination of litigation, legislative momentum, and government recognition of system flaws makes substantial property tax reform in New York City likely within the near future. Institutional investors will need to remain flexible, take advantage of available incentives, and carefully evaluate which property types and locations are best positioned to weather the coming changes.
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