NEW YORK CITY-New York City has the most byzantine system of taxing real estate, which has become a major source of increased expenses for owners of commercial real estate and their tenants. If she were an owner of real estate in New York City, Alice would not have needed to go to Wonderland.

In New York City, there are four classes of property that get taxed: class one consists of one, two and three-family homes; class two consists of multifamily housing; class three includes real estate belonging to utility corporations and special franchise properties; and class four is all other commercial real estate. The property tax the members of each class pay is based on two factors; the tax rate, which the City sets each June, and the property's assessed valuation, which the City announces every January. The Tax Rate for 2012/13 (i.e., for the fiscal year of July 1, 2012 through June 30, 2013) is as follows: class one:18.569%; class 2:13.181%; class three: 12.477%; and, class four: 10.288%.

Looking at the discrepancies in the tax rates, one would think the City government has a problem with class one, the singlefamily houses. However that is not the case because, class two, three and four are assessed at 45% of value, class 1 is assessed at 6% of value. No, you did not misread that number, a one to three family home is assessed at 19% of the value of a multifamily housing unit.

In order to fully appreciate this differential, we should look at the property taxes paid by the owners of different classes of property that are each valued at $1 million. A class one private home pays $11,141 in annual real estate taxes (18.569% of 6% of $1 million), a class two cooperative apartment shareholder or condominium unit owner or rental landlord pays $59,314 in annual real estate taxes (13.181% of 45% of $1 million), a class three utility pays $56,146 in annual real estate taxes (12.477% of 45% of $1 million), and the owner of class 4 commercial property pays $46,296 in annual real estate taxes (10.288% of 45% of $1 million). If one assumes that all property tax payers should be treated equally, then four owners of real estate each worth $1 million should each be paying the City one fourth of $172,897 (i.e. the total collected above) in real estate taxes, or $43,224 in annual real estate taxes.

Obviously, then the owners of classes two through four are paying almost four times more in real estate taxes than a similarly valued one to three family house and are thereby subsidizing the owners of class one property. However, as a result New Yorkers are paying higher costs for office space and retail, and apartment rents.

City Hall has been attempting to figure out why the job market has been anemic, and why there is a dearth of affordable multifamily housing; perhaps they need to look in the mirror.

Stuart Saft is a partner at Holland & Knight in New York City. He can be reached at [email protected]. The views expressed here are the authors' own.