" Skyrocketing purchase prices have put owners in very serious danger of increased property tax assessments."

Purchase prices for apartment buildings have skyrocketed in the past several years, placing owners in great danger of increased real property tax assessments. It is also making it very difficult to reduce assessments. There are, however, several ways to overcome these sale prices. Many transactions have taken place because of their potential for co-op and condominium conversion. Apartment building owners can turn this fact to their advantage and thereby reduce the assessments of their apartment properties.

New York probably holds the distinction as being the only state statutorily requiring most condominium properties to be valued as if they were rental apartments. It is also the only state to not allow the assessed value of an apartment property to include a premium for the possibility of co-op or condominium conversion. The New York State Real Property Tax Law specifically provides that a rental property, "shall be assessed without regard to the value the property may have if converted to a cooperative or condominium basis or if sold or owned for the purpose of such a conversion."

These statutory provisions mean that the purchase price of a particular apartment property or the prices of comparable sales must be carefully reviewed to determine if the price included a premium for the possibility of a co-op or condominium conversion. If so, these sales must be discounted to eliminate the premium. Case law requires the "court to disregard the portion of the purchase price attributable to the value due to possible conversion." Given these guidelines, some appraisers believe that almost no sale of an apartment building could be considered a comparable sale.

Virtually all trial appraisals of apartment properties for assessment purposes are based on the capitalization of income method of valuation. This requires the selection of a capitalization rate. Great care must be taken to use a capo rate that isn't unduly low because of the possibility of condo conversion. This particularly applies when using cap rates derived from published sources such as the Korpacz Real Estate Investment Survey for the National Apartment Market. The 2004 Korpacz Survey, for instance, stated that cap rates were heavily impacted by the "condo conversion craze. "The survey further stated that, "due to the low interest rate environment and the desire for homeownership, many investors now opt to pay a premium for apartment complexes."

It has become critical to utilize a cap rate for real property tax assessment review purposes that has not been pushed too low as a result of the condo conversion craze. Sales for non-conversion properties have considerably higher cap rates than those for properties purchased with conversion in mind. ales for non-conversion properties have considerably higher cap rates than those for properties purchased with conversion in mind.

Korpacz describes institutional-grade properties as being of "brochure quality" and "located in a major market or submarket that is recognized in the institutional investment community … in excellent condition and less than 10 years old."
It may hurt an owner’s pride for his property to be described as “ non-institutional grade”. But proving that a property is properly categorized as non-institutional grade may resulting in a difference of two points or so in the cap rate, and that could be in the critical element in a real property tax assessment review case.
Apartment owners who want the best result in a real property tax assessment case must make sure that the appraiser includes all applicable expenses. These sometimes- omitted expenses include reserves for replacement of both personal (appliances, etc.) and capital (HVAC, the roof, etc.) property, leasing commissions and tenant improvements (renovations to upgrade a rent-stabilized property to justify a higher rental rate).
Following the program outlined here, apartment owners can protect themselves from excessive property taxes that come as a result of today's high sales prices.

William D. Siegel is a senior partner in the Oyster Bay law firm of Siegel Fenchel & Peddy, P.C. and the New York State member of the American Property Tax Counsel. He can be reached at wds@nytaxappeal.com