Still reeling from the recession and the terrorist attacks on the World Trade Center, the New York real estate industry now faces one more blow: an 18.5% increase in the city's real property tax. The tax hike, which took effect in December, will increase the tax burden on Class-A office space by roughly $2 per sq. ft. to a total of $11 per sq. ft.

Douglas Durst, president of the Durst Organization, a major Times Square landlord, says he expects most of the increase to be passed on to tenants. However, landlords may be forced to pick up more of the increase because the third-quarter Manhattan office vacancy rate registered 11.8%, up from 7.6% in the third quarter of 2001, according to Cushman & Wakefield Inc.

The tax hike — part of a package of measures to close what could be a $6.4 billion budget gap this year — could do more harm than good, says conservative think tank The Manhattan Institute. The institute says the move will result in the loss of up to 62,000 jobs because some marginally profitable firms will be forced to lay off workers and other companies will choose to leave the city.

“We hope we're wrong, but we're concerned that it's going to have a negative impact on the city's economy,” says Stephen Spinola, president of the Real Estate Board of New York.

A Skyscraping Increase

For a typical 1 million sq. ft., Class-A office tower, Spinola estimates that taxes will rise by about $1.8 million in 2003. That would push the total tax burden from $9 million to a whopping $10.8 million per year.

Even before the latest hike, New York's commercial real estate taxes were the highest in the country, roughly $9 per sq. ft. for Class-A office space, according to Spinola. Tax bills in Chicago, the second-priciest market, are about $7 per sq. ft. Meanwhile, right across the Hudson River, taxes in New Jersey run only $3 per sq. ft. “We've never been competitive in terms of actual tax dollars,” says Spinola. “This makes us even less competitive.”

And the tax increase is coming at the same time some landlords are dealing with two expensive legacies of Sept. 11 — increased insurance costs of $0.50 to $1.50 per sq. ft., and rising security costs of $0.50 per sq. ft. for Class-A space, according to the New York Real Estate Board.

Local real estate players say New York's status as the country's business center may cushion the blow because so many tenants are determined to be there. Woody Heller, an executive managing director at Insignia/ESG Inc., says he doubts that the incremental costs will push more businesses to relocate to New Jersey or to the suburbs.

“People will tolerate a lot for the privilege of getting the experience of being here,” he says.

For residential landlords, the tax hike may pose greater difficulties. The increase is likely to be slightly lower than for commercial space — about 16%, estimates the Real Estate Board. But some experts say that the actual cost to the landlord may be higher. That's because it will be more difficult for some owners to pass those costs along to their tenants in the short run, particularly in apartments where rents are regulated by the city.

A 20-unit building is likely to incur an increase in its tax bill of $1,000 to $1,500 per unit — or $20,000 to $30,000 beyond its current tax bill, according to Board estimates.

Although the city faces deep fiscal challenges, David Weprin, the Queens Democrat who chairs the City Council's finance committee, says the City Council is committed to keeping property taxes at their current level for at least the next three years. Weprin even held out some hope for an eventual tax rollback. “If the economy turns around, there's no reason we wouldn't.”