Co-op tax reform is on everyone's mind.

Nearly everyone agrees cooperative and condominium owners pay more in property taxes for their vertical homes than do one-to three-family homeowners with horizontal homes of equal value around the city.

There is also reluctant and embarrassed consensus by some politicians that these small Class I homeowners pay less than their fair share of city taxes.

But Council Speaker Peter Vallone said last week "It's not that the homes are paying too little, it's that co-ops are paying too much."

So rather than raise Class I a bit and lower all of Class II, the Mayor, along with Vallone, are proposing to bring co-ops and condos down into Class I. Such action would leave some 25,229 apartment houses alone in Class II.

It would not raise more money in this era of budget deficit, but would result in much less overtime for city coffers. Projections run to some $70 million less in 1996 and $198 million less in 1997, alone.

In ten years, however, the polarization between the homeowners would end under a legislative plan the city hopes to shop in Albany this week as a first step towards property tax reform.

The current plan was suggested in part by the Real Property Tax Reform Commission that was convened by former-Mayor David N. Dinkins to look at the entire city assessment issue.

The disparity of the co-op and condo owners was greatest, and once they screamed the longest, Vallone pledged to provide relief, a pledge that has been joined by Mayor Rudolph Giuliani.

In recent weeks, however, the budget crisis deepened and the relief package was nearly abandoned. But cooperative ownership tends to attract stable taxpayers who vote. While the small homeowners pay less than their fair share, co-op and condo owners do pay more and there was a consensus that the politicians couldn't ask them to wait longer for relief.

Raising the tax bills of small homeowners was also politically unfeasible, nor could the politicians just ask them to make up the millions of dollars it will cost the city in lost revenues from the co-ops.

Currently, the Council's budget mavens are exploring options for the reform measure.

"We are encouraged with the action towards tax reform and look forward to seeing the proposed bill," said Martin Karp, chairman of the Action Committee for Reasonable Real Estate Taxes, an umbrella reform group. "We'll work to support any approach to attaining tax equity."

The President of the Federation of New York Housing Cooperatives, Charles Rappaport, said "We are supportive of any attempt to bring the tax rate between Class I and Class II closer and closer together, provided so long as it actually occurs."

Also supportive was the Apartment Owners Association, comprised of residential management companies representing the interest of co-op and condo owners with regard to taxation and quality of life issues. AOA President Irwin Gumley, who is also president of Gumley-Haft, said they hope the phase-in will remove the disparity and bring co-op assessments in line with where they would have been if they had remained with Class I. "We welcome it as a first step toward fairer taxes for cooperatives and condominiums," he said, "but we're a little bit disappointed at the ten-year time period it will take for the equalization will take place."

Rental apartment groups and even public watchdogs, however, were not so happy with the proposal.

Former Finance Commissioner Carol O'Cleireacain said just helping the co-ops was not the way to achieve equity. "The whole system needs repair," she said. "You can't keep asking Class IV to hold it up."

"It's exactly backwards," said Dan Margulies, executive director of the Community Housing Improvement Program. "What they should be doing is phasing-in increases in Class I so all residential property is assessed equally, rather than chop out pieces of Class II."

Agreed Isaac Sherman, a tax certiorari partner with Moroze Sherman Gordon & Gordon, "It's so Balkanized now. They are going to play with co-ops and not attack the real problem, which is the Class I's."

Dean M. Mead, senior research associate of the Citizens Budget Commission, said their position is that Class I homeowners are being subsidized and it only makes the problem worse if you move more property into that category. "Reforming means bringing Class I rates up to what the other owners are paying and not giving other property owners the same generous subsidy the other owners are getting."

The proposed package is expected to phase-in relief through a pre-determined assessment differential. "We have to define what the inequity is, determine the differential and then say, phase in one-tenth of the differential each year," explained a Council finance division official who is working on the draft legislation. "Once that differential is determined, it will have to be reviewed on a regular basis. We don't want to send them into Class I immediately because of the havoc of class shares."

City properties are divided into four classes and each class pays a certain percentage of the taxes and is assessed at a different tax rate. Small homeowners are in Class I while co-ops and condos for the most part are in Class II, along with apartment homes.

Additionally, Class I taxes are based on 8 percent of market value, while Class II is based on about 45 percent and that is one of the problems the legislation will rectify.

One concern that has been addressed in other jurisdictions with a homeowner's exemption - including Washington, D.C. - is that not all homes are owner-occupied, nor are all co-ops or condominiums. Condominiums have, in fact, become a choice investment for foreigners, who can then obtain unregulated rental income. An investor could also own a dozen single-family homes and have a substantial income and benefit from the assessment cap and low tax rates.

"What are they going to do with the people who own three-family homes and are absentee landlords?," Rappaport wondered.

Another problem for the reformers is that a state law, referred to as Section 581, protects co-ops and condos by dictating they be assessed as if they were equivalent rental properties. This was designed to ensure assessors would not add up the sales prices of the units and assess the entire building based on an artificially high gross sell-out price.

Without Section 581, there would be problems agreeing on how to value these units. Mark Shernicoff, a partner in Zucker & Shernicoff CPAs and an accountant who is treasurer of the Council of New York Cooperatives as well as the Action Committee, noted. "There are many more variables in a co-op than there are from house to house in terms of levels of services."

Sherman said if they were to eliminate Section 581 it would be a disaster. "That is the one basic protection co-ops and condos have. Any plan that does not take into account the required parity the current law calls for would be a disaster for co-ops and self-defeating for an administration that has announced a policy of reducing the tax burden."

To comply with Section 581, since most co-ops and some condos were converted from rental properties and are usually rent stabilized - rent rolls are now "worked-up" to determine an artificial rent roll, which is then capitalized to find a market value for the building for tax purposes. Where the building is newly constructed, rents are determined from equivalent rent stabilized apartments.

The New York State Court of Appeals in Greentrees agreed a newly constructed condominium was to be valued using rent stabilized rents, since the Nassau community had elected to enforce the Emergency Tenant Protection Act.

That act, also known as the Rent Stabilization Law, is in force in New York City and many in the real estate industry believe it has artificially kept building rent rolls - and therefore property tax rolls - low. It is also one element in the destruction of housing, because certain strapped owners cannot collect enough rent to cover costs like property taxes.

Last June, in fact, the Rent Guidelines Board resolved to give some relief to buildings with 30 units or less by providing a low-rent supplement of $15 for apartments renting under $400 per month. But not every building received this help and the delinquency rate is creeping up.

As of September 30, 1994, 14,277 walk--up apartment buildings citywide in Class II, representing 23.24 percent of the parcels, were delinquent in their taxes, while 13.51 percent of the elevatored apartment buildings were delinquent. Class II co-ops by comparison, have a 7.88 percent delinquency rate, and Class I homeowners have around a 7 percent rate.

So now that the co-ops and condominiums are beginning to see a relief package, the apartment house owners are unhappy.

Joseph Strasburg, president of the Rent Stabilization Association, an owner's group representing 25,000 owners, said the politicians are making a mistake, since Class II is already the most overregulated segment of the city's real estate. "If you are giving relief, you should give it for the entire class," he said. "Owners are owners. It's short-sighted to just draw the line on co-ops and condos."

Strasburg said he would not be arguing against the law in Albany, but would fight to expand it to include all rental housing, now under particular stress from high water and sewer bills, overregulation of rents and non-payment of rents by tenants.

Additionally, approximately 60 percent of the rental buildings are 20 units or less, Strasburg noted. "Tell me the difference between a 10-unit and a 14-unit building?," he asked, referring to Council discussions on bringing the seven to ten unit rental buildings into Class I, along with the co-ops and condos.

"We're sympathetic, but this is all what we are trying to do right now," said the Council official. "We have a $3 billion budget with $10 million in discretionary spending."

The Council was at one time was considering the protection of small walk-up apartment buildings of seven to ten units in some manner, possibly by including them in the phased reclassification to Class I. "We're not addressing rentals in this bill," said the official.

Currently, Class I and some buildings in Class II are protected from dramatic assessment rises by caps. Class I assessments cannot rise due to assessment changes more than six percent per year or 20 percent over five years. Class II assessments for those buildings under ten units cannot rise due to assessment changes more than eight percent per year or 30 percent over five years.

"Class 1 will have the normal protection of the 8 percent assessment ratio," explained the Council official. And while small rentals are capped by the eight and 30, we intend to provide caps on assessments for co-ops and condos that are currently not capped to keep the inequity from increasing. So that way we won't have an expanding inequity while we're trying to give relief."

Margulies isn't impressed by the Council efforts. "They are playing a game and trying to distinguish residential housing from residential housing," he said. "I hope they won't get support in Albany for further discrimination."

There is a likelihood that apartment building owners will parlay support of the co-op bill into rent reform, such as obtaining vacancy decontrol, lowering the income requirements for decontrol and obtaining legislation to require the deposit of rents with the court.

Shernicoff worries about the bill from the other side. "I worry are they going to fight for it or are they going to let it die in Albany?," he asked about the Giuliani administration. "There will be room for sponsors, but will it pass both houses and be signed by the Governor? These things have a habit of dying, but it would be reasonably popular because it is the co-ops side of rent control."

Until fiscal year 1983, there were no classes and all property was assessed at the same tax rate. Bill S7000A, passed over a veto by then-Governor Hugh Carey, brought in the current class system, including the transitional assessments.

The system is so complicated, in fact, that the average taxpayer has no idea what their assessments are based on. In Fiscal Year 1993, under the leadership of then Finance Commissioner Carol O'Cleireacain - who is an advocate of taxes based on full market values - taxpayers were first notified of the full market value related to their assessment.

O'Cleireacain, who is no providing private consulting work, was mortified that the city would combine the co-ops into Class I. "Don't they understand this will place higher taxes on the backs of the commercial properties and drive businesses away?" she asked.

The drafters, the City Council and the Department of Finance, could toy with class shares over the next few years and eventually raise the tax rates for the newly constituted Class I to make up for "lost" revenues.

Many believe the current system is already way too complicated and should be simplified, rather than starting another layer of phase-ins and differentials.

Said Margulies, "They have to concentrate on bringing overall tax rates down and equalizing the burden on all property tax payers - residential and commercial - based on actual values, rather than simply shifting the burden around at political whim."