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Dec

Broad Problems, Narrow Solutions for NYC Real Estate

Can incentives cure the city's property market funk?

The City of New York's tax assessment valuations remain on an upward trajectory that compounds the burden on property owners. In stark contrast to this fiction of prosperity and escalating valuation, real estate conditions tell of a growing threat that menaces all asset classes across the city.

Pharmacies, retail stores and restaurants with deep roots in the community are vanishing at astonishing rates, victims to changes in consumer habits post COVID-19, competition with e-commerce, and rising costs associated with labor and supply chains.

Remote and hybrid work practices have taken a heavy toll on commercial office buildings. Submarket vacancy rates in the sector are cresting 20 percent, while individual office properties wrestle with vacancies ranging from 50 percent to 100 percent.

While hotels have improved due to demand for temporary migrant housing, they still have not fully recovered to pre-pandemic occupancy levels. Meanwhile, multifamily rents continue to rise, straining the budgets of long-term residents and driving many renters to an affordable housing sector where supply remains insufficient to meet the needs of an expanding population.

Despite the challenging market conditions, the city's property tax bills continue to increase, driven by a host of underlying factors.

Assessments ascending

Taxable, billable assessed value citywide increased by 4.2 percent this year to $298.9 billion. Assessments climbed 4.5 percent for co-ops and condominiums, but also increased in hard-hit commercial sectors. Retail valuation climbed 1.6 percent, and total valuation for office properties grew 2.5 percent from the previous year.

Why the disconnect between challenges in the real estate market and the rising burden of property taxes? Several factors could be pressuring assessors to increase assessment values. Here are just a handful:

Need to raise revenue. Property taxes represent approximately 30 percent of the city's budget, and the municipality's financial obligations continue to grow. The city continually seeks additional revenue to fund employment agreements, pension obligations, expenses associated with homelessness and migrant populations, and other expanding costs.

Market myopia. Property taxes are based on annual valuation updates that may not accurately reflect the quick shifts the market is experiencing, such as skyrocketing vacancy rates and the need to make costly building improvements to attract and retain tenants. As a result, property owners may face tax bills that do not correspond to the current economic environment

Debt, disregarded. The city's property assessments ignore debt service, leading to overestimations of taxable value. Commercial real estate sectors are facing growing pressures related to renewing existing debt, especially at today's high interest rates. Debt service obligations on many commercial properties now exceed the asset's market value, making it increasingly difficult for property owners to refinance, operate or sell their properties at a profit.

Dated data. Even where there is increased vacancy, the assessors still use outdated estimates of market rents and occupancy to impute income for vacant spaces, thus keeping assessments artificially high.

Tax relief options

Amid these mounting challenges, a property owner can often mitigate their tax burden by contesting the assessor's conclusions and arguing for a reduced assessment. Alternatively, or additionally, taxpayers can apply for relief under the city's abatement and exemption programs. An adviser experienced in the property tax law and local practices for the subject property's jurisdiction can be a valuable aid in identifying and pursuing tax relief options.

Here are the major real estate tax programs the city offers to provide property owners with relief while incentivizing investment in the community:

The Industrial and Commercial Abatement Program (ICAP) provides property tax abatements for businesses that make capital improvements in commercial and industrial properties. For both renovations and new construction, it provides a 10- or 12-year benefit for renovations in Manhattan below 59th Street, and 15 or 25 years of benefits above 96th Street and outside of Manhattan. By renovating and repurposing older, underutilized properties, ICAP helps generate productive spaces and revitalize neighborhoods. Without these incentives, the cost of construction and renovation is often prohibitive for the property owner.

ICAP was set to expire next spring, but the State Legislature recently extended the program to April 1, 2029. While this is a great program to encourage property rehabilitation, it hinges on the owners' ability to pay for substantial capital improvements and to secure tenants at market rents. Not all properties can fit that profile.

The Affordable Housing from Commercial Conversions program offers tax exemptions for owners who convert commercial properties into residential rental units. Also known as the 467-m program, this initiative seeks to increase the supply of residential housing and is a boon to owners of some outmoded office properties who seek to revitalize their buildings through a change in use.

The benefits are great – owners pay zero taxes during construction and 90 percent of normal taxes for 35 years after completion. However, 25 percent of the units must be offered at affordable rents.

The problem with this program is that many office buildings are poorly suited to residential conversion under current residential building and zoning codes. Achieving workable apartment layouts and window locations can be challenging, and in some cases, conversion may exceed the cost of new multifamily construction.

The Affordable Neighborhoods for New Yorkers program, or 485-x, incentivizes the creation of affordable rental housing across the city and is the successor to the 421-a program. Developers of buildings with more than 11 rental units, and who make 20 percent to 25 percent of the property's units affordable, are eligible for property tax exemptions for up to 40 years.

485-x is a critical tool in expanding the city's affordable housing stock as rising rents displace long-time residents. The affordable component remains in effect beyond the benefit period, however, which deters many developers.

The snapshot of NYC's assessment quandary is this: The market is demonstrating lower valuations, but tax assessments remain stubbornly high. The incentive programs require substantial new capital outlays for construction, and the end product needs to be economically viable.

As in all stories, time will tell how New York addresses its property tax dilemma. But if market conditions continue to decline, the current incentives will not resolve the problem of excessive property taxation.

Joel Marcus is a partner in the New York City law firm Marcus & Pollack LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys

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Joel Marcus Northeast Real Estate Business New York Property Tax New York City

Apr

NYC's Post-Pandemic Real Estate Decline

Published Property Tax Articles

Market deterioration and municipal ineptitude are driving taxpayers to the courts for relief.

The New York City real estate market, once the pinnacle of economic health, has undoubtedly declined in recent years. Exploring the factors that brought the market to this point paints a clearer picture of what current conditions mean for property taxpayers and suggests strategies that may offer relief.

Five Causes of Decline

The COVID-19 pandemic left an indelible mark. The coronavirus took a significant toll on New York City, which became an epicenter of U.S. infections. Many residents fled to suburban areas for more space and less harsh mandates from local authorities. According to a Cornell analysis of U.S. Census Bureau data, "New York City's population plunged by nearly 4 percent – more than 336,000 people – during the pandemic's first year as residents migrated to less dense areas in nearby counties and neighboring states."

The New York City Comptroller's Office estimated that the City lost an additional 130,837 residents from March 2020 through June 2021. This caused unprecedented vacancies in residential and commercial properties, and approximately 100 hotels in the City closed. Those that survived endured high vacancy rates and struggled to pay property taxes.

Economic uncertainty plagues the real estate market. The economic fallout of elevated vacancies and decreasing income has rendered investors and developers hesitant to invest in New York City real estate.

Remote and hybrid work slashed office demand. The decline in office usage that accelerated during the pandemic is ongoing and appears permanent. Most workplaces have loosened to a hybrid work environment, and many employers allow a full-time work-from-home option as well.

This means office buildings that once bustled with employees are now vacant or significantly emptier than they were in 2019. Midtown Manhattan lunch spots and after-work happy hour sbars and restaurants have also taken a hit. The National Bureau of Economic Research estimated in 2022 that New York office buildings had lost as much as $50 billion of value in the wake of reduced demand.

Crime is soaring. New York City police reported making 4,589 arrests for major crimes in June, a 9.3 percent increase from the same period a year earlier. In the first six months of 2023, officers made 25,995 such arrests – the most for any half-year period since 2000.

Property tax revenues are under threat. The previous trends have been slow to erode the municipal view of the tax base. The City's Department of Finance reported a tentative assessment roll of $1.479 trillion for fiscal 2024, a 6.1 percent increase from the previous tax year. For the same period, the department reported a 4.4 percent increase in citywide, taxable, billable assessed value, the portion of market value to which tax rates are applied, to $286.8 billion.

"New York City continues to show mixed signs of growth and economic recovery, with the FY 24 tentative property assessment roll reflecting improvements in subsectors of the residential market while key commercial sectors still lag behind pre-pandemic levels despite modest growth over the past year," Department of Finance Commissioner Preston Niblack said in a press release announcing the tentative tax roll.The decline in office occupancy continues to impact retail stores and hotels in the City contributing to the sector's slow recovery. At the same time, single family homes, which constitute a majority of residential properties, have exhibited a robust recovery and continued growth."

A study by NYU's Stern School of Business and Columbia University's Graduate School of Business calculated that a decrease in lease revenue, renewals and occupancy would cut the value of office buildings in the City by 44 percent over the next six years. Based on those findings, a worst-case analysis by New York City Comptroller Brad Lander found that a 40 percent decline in office property market values over the same six years would result in $1.1 billion less tax revenue for fiscal 2027, the last year of the City's current financial plan. Real estate taxes on office properties currently generate 10 percent of overall City revenue. The City expects office vacancies to peak at a record 22.7 percent this year, posing a potential threat to tax collections.

The result of the forgoing changes is that income is down, expenses are up, demand is evaporating, and market values have plunged by more than 50 percent for most commercial properties except perhaps multifamily (although sales of condominiums have stalled due to high mortgage costs).

How To Get Relief

The hotel industry anticipates a four-year recovery period. Hotel owners preparing arguments for reduced assessments should collect information for their team documenting closure dates, occupancy rates, and any specific pandemic-related expenses incurred during the reopening process.

It is inappropriate for assessors to evaluate hotels for property tax purposes solely based on non-real-estate income. A recent court ruling has affirmed the illegality of utilizing non-real-estate income generated by hotel businesses, leading to an overassessment of real estate taxes that must be refunded to owners. Business-related income, such as that from movie rentals, should not be considered in property tax assessments.

In addition, it is essential to identify and exclude income from personal property, furnishings, and the value of intangibles, franchises, trained workforce, and going concerns when determining real estate income.

The prevalence of empty stores and closures of local standby establishments in every corner of New York City underscores the severe economic impact on retail properties. Retail and office owners should be prepared to demonstrate declines in gross income and rents reported in their financial filings with the City. They are also required to provide a list of tenants who have vacated or are not paying rent. The Tax Commission now mandates an explanation for declines in rents exceeding 10 percent.

There is considerable potential for assessment reductions, but it is crucial for taxpayers to compile evidence of market value declines, and to collaborate with experienced advisors to secure warranted tax reductions.

There is no longer any absorption of vacant office space since demand is declining. That means that 80 percent occupancy or lower is the norm. Only an adjustment in property taxes to the actual earnings of the property will save the real estate, and over-leveraged properties may be lost.

Tax Process in a Tailspin

Extensive personnel turnover has hampered the review process that relies on action by City agencies, with inexperienced staff and numerous unfilled positions at both the Department of Finance (assessors) and the Tax Commission. Thus, expected remediation of excessive assessments often go unresolved. This leaves no alternative but to go to court.

Resorting to the courts is also difficult because in-person appearances are still relegated to video conferences, with few trials taking place.

The taxpayer's best approach is to push forward with all speed to demand a trial. Only pressure to demand speedy trials will provide the needed result.

Joel Marcus is a partner in the New York City law firm Marcus & Pollack LLP, the New York City member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Odelia Nikfar is an associate at the firm.

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Northeast Real Estate Business Odelia Nikfar Joel Marcus New York Property Tax

Mar

New York City Tax Assessments Disregard Reality

Published Property Tax Articles

New York City has published three tax-year assessments since COVID-19 swept into our world. The New York City Tax Commission and New York City Law Department have had ample opportunity to reflect and refine their thinking on those assessments.

The disease broke out in Wuhan, China, in late 2019 and soon spread around the world. Most of New York City noticed its impact in February and March of 2020 as businesses shut down at an accelerating rate, warranting government mandates and additional closures.

So, what did New York City do for the 2020-2021 tax year? It significantly raised tax assessments. The Tax Commission and other review bodies refused to base their valuations upon the devastating catastrophic effects of COVID-19 that had ravished the city.

Why do this? The answer is technical. New York City values real estate on a taxable status date, which is Jan. 5 each year. On Jan. 5, 2020, COVID-19 did not exist in assessors' evaluation process. Nor did it exist in the review of assessments later in the year.

Employment restrictions, mask mandates and lockdown requirements made it impossible to operate theaters, hotels, restaurants and many other businesses. These restrictions took effect long before the first installment of property tax payments for the 2020-2021 year had to be paid. Yet hotels found that their tax bills exceeded their total revenue. Other businesses had similar experiences.

The city's next assessment, for the 2021-2022 tax year, reduced assessments by 10 to 15 percent in some sectors, and by as much as 20 percent for hotels. It was too little, too late, and many businesses were failing. The assessment review process was slow and unsympathetic to the plight of businesses devastated by COVID-19.

The Jan. 5, 2022 assessment roll attempted to recoup a modest amount of the value trimmed from taxpayers' properties the previous year in spite of the destructive effects of the Omicron variant that were at their height on the Jan. 5 valuation date. That is the truth: New York City's newly released fiscal 2022-2023 property tax assessment roll presents a market value of almost $1.4 trillion, an 8 percent increase in taxes and estimated taxable assessments of $277.4 billion. That sounds like too much!

Real estate tax increases have come at a time when most property owners and businesses have not even begun to recover from the pandemic's economic impact. Foreign and business travel have disappeared; street traffic is down and empty storefronts abound.

Commercial rents in Herald Square, for example, are down 27 percent from pre-pandemic levels. However, high bills due to ever-increasing inflation remain to be paid. Mortgages, payrolls and maintenance costs add to the burdens of businesses in New York City. Most properties are still struggling, and many are falling behind.

The hospitality sector has been hit especially hard. Hotel revenues and prices have dropped to unsustainable levels. COVID-related rules and fears have evaporated any sustainable growth in tourism. One example of the pandemic hotel market value decline is the recent sale price of the DoubleTree Metropolitan at 569 Lexington Ave., which was 50 percent less than the price it sold for in 2011.

While a few market values have increased, tax increases should have been delayed. For Class 1 real estate, which includes residential properties of up to three units, total citywide market value rose 6.7 percent to $706.8 billion from the previous year's tax roll.

For Class 2 properties — cooperatives, condominiums and rental apartment buildings —the total market value registered $346.9 billion, an increase of $27.8 billion, or 8.7 percent, from the 2022 fiscal year. For Class 3 properties, which include properties with equipment owned by gas, telephone or electric companies, market value is tentatively set by the New York State Office of Real Property Tax Services at $43.6 billion.

Last but definitely not least, total market value for commercial properties (Class 4) increased by 11.7 percent citywide to $300.8 billion. Manhattan had the smallest percent increase in market value at 10.3 percent. Class 4 market value is down $25.2 billion, or 7.7 percent, below its level for the 2021 fiscal year. Hotels registered a market value increase of only 5.3 percent.

These slight increases in market value do not warrant this year's increase in taxes. Businesses are still being affected by the economic impact of the pandemic and need time to recuperate. The city's Department of Finance admits that although values increased for the 2023 fiscal year, they remain below the 2021 fiscal year values for many properties due to the impact of the pandemic.

The Department of Finance also acknowledged in its announcement of the tentative tax roll that commercial property values remain largely below pre-pandemic levels. This underscores why the increase in taxes should have been delayed, at least until properties and businesses attain pre-pandemic values.

Strategies for Relief

In appealing assessments, property owners can improve their chances for obtaining relief by quantifying property value losses. For hotel owners and operators, this means gathering documentation showing closure dates, occupancy rates and any special COVID-19 costs incurred. Most industry forecasts anticipate at least a four-year recovery period for hotels to reach pre-pandemic revenues.

Retail and office property owners should be prepared to show any declines in gross income and rents received or paid on their financial reports filed with the city. Residential landlords should list tenants that vacated and those that are not paying rent.

In conclusion, tax assessments must reflect the entirety of what this pandemic has done to the real estate industry over the past 24 months. New York City authorities must provide tax relief for property owners, and taxpayers and their advisors will need to take an active part in obtaining reduced assessments.

Joel Marcus is a partner in the New York City law firm Marcus & Pollack LLP, the New York City member of the American Property Tax Counsel, the national affiliation of property tax attorneys.

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Jun

New York City's Pandemic Property Tax Problems Persist

Published Property Tax Articles

Property tax assessments show market-wide value declines for the first time in 25 years but fall short of reflecting taxpayers' true losses.

What happens when an irresistible force meets an immovable object?

The longstanding physics conundrum encapsulates the situation in which New York City property owners currently find themselves, and for better or worse, they're about to discover the answer to the age-old question.

City government has squeezed increasing sums of property taxes from its real estate stock in each of the past 25 years, but the pandemic is changing everything.

The basic fact is that 53 percent of New York City revenues come from real estate taxes. Fueled by rising rents
that are tied to high costs of new construction, the city property tax base has grown and enjoyed record tax revenues in recent years.

Total real property tax revenue was almost $30 billion in 2020, according to the city's annual property tax report. Nothing paused the year-over-year tax increases – not the 2008 financial crisis, nor Hurricane Sandy, nor even 9/11. Only a global pandemic could do that.

COVID-19 has affected every element of New York City's economy, but its effect on real estate and property taxes deserves special attention. Total market value of Class 2 properties (cooperatives, condominiums and rental apartment buildings) decreased by 8% last year, according to the Department of Finance's tentative property tax assessment roll for fiscal 2022. Total market value for Class 4 properties (non-residential commercial properties such as hotels, offices, retail and theaters) fell by a whopping 15.75%, including a 15.5% drop for office buildings. Citywide declines were 21% for retail buildings and 23.8% for hotels.

Impact of Tax Status Dates

New York City assesses all its real estate as of Jan. 5 of each tax year. Therefore, last year's market values set as of Jan. 5, 2020, did not reflect any effects of the soon-to-arrive pandemic. For the 2021-2022 tax year, however, the valuation date of Jan. 5, 2021, must fully account for the impact of COVID-19.

As the tentative property tax assessment roll shows, tax assessors have acknowledged significant reductions in property values. But were these values decreased enough to reflect actual contractions in market value?

Many property owners and tax experts believe that recent assessments fail to adequately reflect the extent to which property owners have suffered due to the pandemic. Taxpayers filed a record number of appeals by the March 1 tax protest deadline and there are massive appeal efforts underway to complete the Tax Commission's review of all the filed cases by the end of the year.

While the newly released assessment values show that assessors addressed many COVID-19 issues, such as the negative effects of state and city executive orders and lockdowns, many properties have not seen adequate assessment reductions. Many hotels, for instance, are experiencing ongoing closures, and some hotels report that their total 2020 revenues are less than their property tax bills, even before accounting for operating expenses and debt service. Theaters do not have a hint of a future reopening in sight. Retail landlords have either lost their tenants or stores are withholding rent payments. Residential renters are not paying rent and new laws prohibit eviction proceedings.

Relief Strategies

Property owners can improve their chances for obtaining further relief on appeal by quantifying property value losses. Hotels should gather documentation showing closure dates, occupancy rates and any special COVID-19 costs they will incur when they reopen. Some 25,000 rooms have been permanently closed, and of the few hotels that did not cease operations, occupancy was about 25% for most of the tax year. Some occupied rooms were for COVID-19 patients and displaced homeless families. Industry forecasts anticipate a four-year recovery period for hotels.

Retail and office property owners should be prepared to show declines in gross income and rents received or paid on their financial reports filed with the city. Make a list of tenants that vacated and of those not paying rent. Additionally, the Tax Commission now requires taxpayers to explain the basis of rent declines greater than 10%.

Tax assessments must reflect the entirety of what this pandemic has done to the real estate industry. Almost every avenue and street in New York City has multiple empty stores and local standby establishments are out of business. Theaters and Broadway are shattered; tourists and all manner of visitors have vanished, leaving an empty, lonely and bleak picture for real estate.

New York City authorities must provide more substantial tax relief for property owners. Taxpayers and their advisors will need to take an active part in obtaining reduced assessments, by carefully assembling proof of the decline in their property's market value.

Joel Marcus is a partner in the New York City law firm Marcus & Pollack LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Apr

Assessment Shock and Awe in NYC, and your Properties are the Target

Published Property Tax Articles

The newly released New York City Tax Assessment Roll had a total market value of$1.258 trillion. These results are shockingly bad news for the real estate industry. On average, tax assessments increased by about 9.4 percent.

The breakdown of increases in the assessments are also very surprising, with residential apartments growing by 11.51 percent, while taxable values on commercial properties climbed 7.85 percent. By borough, Brooklyn leads the way in increases, followed by the Bronx, Queens and Manhattan. Staten Island had the lowest percentage of increase at 6.36 percent.

Residential apartment buildings, rentals, cooperatives and condominiums showed strong valuation increases, which appear to be at odds with recent market weakness noted in all these property types. It is well documented that residential rents are slipping or flat, concessions are on the rise, and sales of co-ops and condos have stalled and are showing further signs of decline.

Furthermore , the loss of state and local tax deductions under the new federal tax law increases the burden on taxpayers. All of these factors exert a negative influence on market values.

What we will see in this assessment roll, and in statistics compiled by the New York City Department of Finance, is a strong emphasis on increasing tax burdens across all property types. This effort disregards the current pressures the market's real estate owners are already facing.

It is significant that the mayor has the sole discretionary authority to increase this specific tax. Virtually every other tax collected in the city needs approval from the state legislature, which may be why property taxes are continuing to go up. Just over 45 percent of all revenues for the City of NewYork now come from real estate taxes.

Even hotels, which are experiencing lower revenue per available room and competition that has intensified in recent years with the addition of thousands of new rooms, face an increase of 4 to 5 percent. This rubs more salt in to the wound for this property class.

What the city is doing in this new tax roll is killing the goose that gave us the golden eggs. We see more vacancies and empty store fronts, traffic at a standstill, mass transit in failure and mounting subway line closures. How tough are they making it for the real estate industry to survive?

There is a great need for property tax reform in this city. The percentage of taxes levied on real estate is out stripping taxpayers' ability to pay for it. In effect, the government is almost a 40 percent partner of all the real estate properties without sharing in the risk or having skin in the game. This ever growing push to squeeze the last dollar out of our industry will only hasten its fall.

We should call on our government to be more reasonable and limit property taxes to an affordable level. This would be a better strategy, priming the pump of the local economy and permitting future growth. When owners find that their property's largest single expense is its tax burden, which is out of control, they must do something about it-and do it now.

Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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May

Property Tax Assessments Spiral Out Of Control In New York

Published Property Tax Articles

Massive assessment hikes in New York City confirm that Mayor Bill de Blasio intends to extract as much revenue as possible from real estate, one of the city’s most important industries. This will kill the golden goose underlying the city’s economic recovery.

The city released its tentative assessment roll for the 2015-2016 tax year on Jan. 15, 2015, revealing painful and substantial increases in market value for both residential and commercial properties. The city pumped up the value of residential properties by almost 11 percent, while driving up commercial assessments by 12 percent over the prior tax year.

These increases are nearly double the rate of increase effected by last year’s final assessment roll, where residential market values increased by 6.6 percent and commercial market values increased by 7 percent over the 2013-2014 roll.

The compound effect of year-after-year increases is a crushing burden to owners and tenants, but the higher end of the commercial property spectrum was particularly hard hit in the latest assessment roll. Owners of trophy office buildings saw their market values spike by more than 31 percent over the prior year’s values.

Even worse, owners saw the market value of luxury hotels soar almost 65 percent over the previous year’s values for assessment purposes. The city is rough-handling these properties with mounting harshness on both sides of the income and expense equation.

As a result of the new citywide assessments, real estate taxes in the city continue to substantially erode owners’ and developers’ bottom lines. Based on an analysis of the most recent assessment roll, the percentage of income now dedicated to paying real estate taxes is so high that the city has essentially become a silent partner in these properties — without the inherent risks of ownership, of course.

Consider the example of a non-exempt Manhattan residential property, with annual net operating income of $1 million before real estate taxes. Factoring in the current municipal residential tax rate and the prevailing capitalization rates used by the City Department of Finance, our hypothetical property yields a taxable assessed value of approximately $3.6 million and a property tax bill of about $463,000.

That burden means the property owner in this example is paying 46 percent of his or her net income in real estate taxes alone. Even analyzing the numbers based on a gross income of $1.4 million (based on the Department of Finance’s most recent expense guidelines), city property taxes account for more than one-third of the property’s overall expenses.

The situation is similarly oppressive for commercial properties, although they currently enjoy a lower property tax rate and higher capitalization rates than their residential counterparts — at least according to the most recent New York City Department of Finance Assessment Guidelines. Utilizing a similar analysis to the residential example above, the owner of a midtown Manhattan office building with a net operating income of $1 million would be paying just under 40 percent of its net operating income and almost 30 percent of its gross income in real estate taxes.

Based on the de Blasio administration’s ever-increasing crusade for revenue, owners and developers can expect this trend to continue. However, there are a number of avenues for them to pursue in order to ameliorate the effects of this rapid and seemingly endless rise.

While the release of the 2015-2016 assessment roll may have upset many taxpayers, it also marks an opportunity. That’s because the roll’s release begins the process under which owners and developers can initiate challenges to their property tax assessments. Based on the situation described above, it is likely that most of them will be doing exactly that.

Owners must challenge their assessments by filing applications and supporting documentation to the New York City Tax Commission. The owner’s representative must prepare a detailed analysis of conditions at the property, an analysis of leasing and vacancy, and a carefully prepared set of comparable properties to support the relief sought.

The Tax Commission is the administrative agency charged with annually hearing owners’ real estate tax challenges. The agency has the power to offer a reduction in the challenged assessment. Owners who are dissatisfied with the results of this Tax Commission review are entitled to challenge their assessments in New York State Supreme Court.

JoelMarcus Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct

New York Tax Uncertainty

Published Property Tax Articles

The future of New York City's 421-a tax exemption is highly uncertain, particularly in light of the election of Mayor Bill de Blasio, whose initiatives appear to call for sweeping changes to the program.

The 421-a program, which is scheduled to expire on June 14, 2015, provides substantial real estate tax exemption benefits for the developers of new multifamily buildings. Currently, the city determines the level of exemption provided to an eligible building under 421-a; that determination is based on a geographical and functional basis.

That could change under de Blasio's proposed "Five-Borough, 10-Year Plan." The proposal, relating to the creation or preservation of 200,000 units of affordable housing, frequently references the 421-a program, alluding to its future presence in the real estate market.

The city created the 421-a program in 1971 to encourage multifamily construction by granting a partial tax exemption for the property owner. In 2008, changes to the program had a prospective effect on 421-a projects. These modifications included a dramatic expansion of the Geographical Exclusion Areas (GEA), in which properties must meet additional requirements to qualify for an exemption. The amended laws eliminated as-of-right, or automatic, benefits for new multifamily construction throughout Manhattan. In addition, significant sections of the outer boroughs became part of the GEA, effective for buildings that commenced construction after June 30, 2008.

The law created exceptions for projects within the GEA to obtain a tax exemption. To qualify, at least 20 percent of the units must be affordable to families whose income at initial occupancy does not exceed 6o percent of the area median income adjusted for family size. In addition, projects located in a GEA could qualify for benefits via the purchase of negotiable certificates. Under the negotiable certificates program, affordable housing developers can sell negotiable certificates to market-rate developers, who use the certificates to access tax abatements.

Hints of Change

Based on Mayor de Blasio's proposal, the percentage of affordable housing required per project may increase to provide for more affordable units.

The proposal highlights the establishment of a new, mandatory Inclusionary Housing Program, which will serve a broader range of New Yorkers with varying income levels. The Inclusionary Housing Program offers an optional floor area bonus to developers of new residential buildings, in exchange for the creation or preservation of affordable housing.

The new residential housing can be onsite or offsite, so long as it is within the same community board jurisdiction or within a half-mile radius of the site receiving the floor area compensation. The program seeks to promote economic integration in areas of the city undergoing significant new residential development. In order to qualify under the current Inclusionary Housing Program, the affordable units must be affordable to households at or below 80 percent of the area median income.

In contrast to the current Inclusionary Housing Program, some observers speculate that the mayor's proposed program would require all developers to put aside at least 20 percent of their units for low-income families. These units would then remain permanently affordable.

Currently, developers are able to layer 421-a benefits on top of inclusionary housing benefits, therefore allowing developers to take advantage of both programs. By allowing this double-dipping of benefits, the city creates a greater incentive for developers to provide onsite affordable housing.

However, de Blasio's plan may change the way developers use multiple subsidy programs together. The proposal states that in situations where a developer pursues multiple subsidies, the city will increase the percentage of affordable units required for eligibility and/or require that the developer provide deeper affordability.

No automatic exemptions?

Some observers have speculated that the mayor's plan may expand the GEAs of the city and reduce, if not completely eliminate, any as-of-right areas for 421-a construction. As Manhattan is already a GEA, this proposal would affect those areas in the outer boroughs that were not classified as GEAs in 2008. Moreover, developers in the expanded GEAs would be required to provide a higher percentage of affordable units (some proposals call for as much as 50 percent affordability) and offer apartments to families at 40 percent to 50 percent of area median income.

Proposed changes to the program also include eliminating some of the strict requirements that developers must meet in order to receive a 421-a Certificate of Eligibility. For example, under the current program, a qualifying property must meet one of the following three conditions:

All affordable units must have a comparable number of bedrooms to the market rate units, and a unit mix proportional to the market rate units. Or
At least go percent of the affordable units must have two or more bedrooms, and no more than go percent of the remaining units can be smaller than one bedroom. Or
The floor area of affordable units is no less than 20 percent of the total floor area of all dwelling units.

Mayor de Blasio's proposal seeks to modify or eliminate what the administration terms inefficient regulations," since existing requirements may force developers to build larger units than the market dictates.

Overall, the filing process to receive a Certificate of Eligibility is time consuming, due to regulations such as the unit distribution requirement. Mayor de Blasio's proposal states that it seeks to "streamline the 421-a program, improving its usefulness to developers and its ability to promote affordability, by eliminating outdated and unnecessary programmatic, eligibility, and oversight requirements."

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New York Property Tax National Real Estate Investor Joel Marcus

May

New York City Assessors Elevate Forms over Substance

Published Property Tax Articles

"New York City has launched an all-out effort to deprive taxpayers of hard fought tax exemptions and find new ways to impose high penalties for late and defective filing. The measures are all calculated to bring in additional revenue..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor - online, May 10th, 2013

The New York City Department of Finance has generated millions of dollars in additional revenue for the city coffers by directing new and greater efforts to serve penalties and remove tax exemptions from property owners who fail to make complete and timely filings of routine information statements. In the process, however, the city has deprived many property owners of valuable tax exemptions that they were entitled to, or charged stiff penalties for what amount to minor infractions and late or incomplete returns.

Late last year, property owners received notices to file a certificate of continuing use for commercial tax exemptions like the Industrial and Commercial Incentive Program and the Industrial and Commercial Abatement Program. The notices warned that even though a property owner may qualify for continued benefits on these multi-year, legislative as-of-right incentive programs, failure to timely file the renewal form would result in the exemption's cancellation.

This form only asked a few routine questions, requiring the property owner to list the square footage of commercial or industrial space, the number of permanent employees at the building, and report the number of employees who were New York City residents. In fact, the city had discontinued the form for the past 10 years.

Many owners were either unfamiliar with the form or failed to receive notices that were mailed to the wrong address, in many cases because the city failed to note a change in ownership that occurred during the past decade. To complicate matters, only a form specifically generated by the Department of Finance for each property could be used, requiring those who did not receive it to request a duplicate. So where a property owner had multiple parcels and lacked the correct form for one or more of its properties, the city refused to accept a standard form that did not carry its barcode.

The city allowed no margins for error. If the property owner left even one question blank, as in the number of permanent city residents that worked in a shopping center or office building, this was grounds to declare the form incomplete and invalid.

Not-for-profits received a similar request to renew Educational, Charitable and Religious exemptions by returning a different renewal form on a timely basis. Many houses of worship and schools that failed to receive the notice or were negligent in completely filling out and returning the form on time saw their exemptions removed.

Many not-for-profit organizations had enjoyed an exemption for decades, if not longer, and considered the exemptions to be granted by the State Constitution and state legislation. Some of those organizations were unfamiliar with this new policy and ill-equipped to delineate details of tax exempt uses and purposes. After all, this information previously was only required on the initial exemption application, filed long ago by people long since departed.

In the process, a great many of these venerable institutions lost an exemption for which they were absolutely qualified. In many instances they were forced to engage counsel and file appeals at the tax commission, which found that the removals were unjustified.

The most severe of the form-failure penalties fell on Real Property Income and Expense (RPIE) filers. The RPIE is a mandatory report of income and expenses, but some properties fall into one of several filing exemptions, such as those with new owners. Although exempt from filling out the entire form, new owners had to check a box on the form affirming that they were exempt from filing. Therefore a failure to report back to the city that they weren't required to file the form became a reason to charge a penalty for failing to file a form on time. Here the penalties, rarely if ever experienced before, became commonplace.

Last year the city collected fines of $100,000 or more for minor infractions of the filing deadlines. To make matters worse, the city imposed many penalties a year or more after the alleged infractions, with the unfortunate result of saddling new owners with penalties because the previous owners failed to file two years earlier. Filing errors not being of record, title companies are unable to insure against such losses.

Notwithstanding that for more than 20 years RPIE compliance has been greater than 99 percent and only three examples of fraud are on record, the Department of Finance now is proposing legislation to tighten the screws again. The department refuses to trust taxpayers to file these returns themselves, and has asked the City Council to move the annual due date up from Sept. 1 to June 1, with a new requirement that the form be completed and certified by a certified public accountant (CPA).

Property owners who submitted RPIE statements digitally on the Department of Finance website each September previously will now have to file using a CPA ertificate by June 1 each year. That means owners will incur certification fees for all commercial properties with an assessed valuation of $1 million or more (a CPA fee is usually $10,000 or more depending on the property). This burden never existed before.

Since the Department of Finance online entry system doesn't adhere to generally accepted accounting principles, and because it excludes large categories of income and expense, it may prove impossible for many CPA's to comply. Also, by excluding these categories, the report doesn't mirror the owner's actual operating information, making it impossible for anyone to sign or attest to it.

These policies elevate "form over substance" to an entirely new — and sinister — level.

JoelMarcus Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel(APTC), the national affiliation of property tax attorneys. He may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Joel Marcus National Real Estate Investor New York Property Tax

Mar

New York City's Relentless Reassessments Raise Revenue—and Eyebrows

Published Property Tax Articles

"The New York City Charter grants property owners the right to protest their tentative assessments from Jan. 15 (or the first day following weekends and/or holidays) until March 1..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor - Online, March 2012

In its 2012-2013 tax roll assessment, New York City has once again reported major increases in property values. Bucking the national trend toward flat or downward value changes, the city in January found that overall market value had grown to more than $876 billion, up by more than $31 billion from last year's record $845.4 billion.

Remarkably, the taxable assessment (approximately 45 percent of market value) is only the latest step in a relentless series of increases in the taxpayers' burden, dished out each and every year since 1995. Bar graphs of total assessed values for each year by property class reveal the linear, uninterrupted nature of the changes, with nary a hint of the variations that would be expected during the two most recent economic recessions. (See chart.)

jmarcusgraph

Last year's assessment increase provoked an angry backlash from both residential and commercial property owners. As a result of these widespread protests, the New York City Department of Finance agreed to voluntarily roll back assessments of cooperatives and condominiums (owned by voting taxpayers) that experienced assessment increases of 50 percent or more, choosing to instead limit increases on those properties to no more than 10 percent over the prior year. Properties that had received an assessment increase of 49 percent or less, however, went unchanged onto the 2011-2012 roll.

The Department of Finance had to correct 30,457 property assessments, and the Tax Commission handled 50,022 appeals covering 183,811 separately assessed tax lots. The Tax Commission's remedial actions yielded $560 million in tax relief to aggrieved taxpayers.

Repeat performance?

With the tentative assessment for the tax period running from July 1, 2012, through June 30, 2013, and showing dramatic value increases yet again for certain residential properties, there is a flurry of legislative activity promoting a new class of property for cooperatives and condominiums. As proposed, this class would have its tax increases capped at no more than 6 percent each year, the same treatment now accorded to one-, two- and three-family homes.

This legislation, if passed, still won't eliminate the precipitous disparity in taxes between apartments and homes. The cap on homes has been in effect since 1982, and now most homes are assessed at a very small fraction of their current market value.

Citywide, the taxable assessed values of one-, two- and three-family homes (Class 1) increased 3.11percent from last year's assessment. Rental apartments, co-ops and condos (Class 2) are up 5.15 percent, and office, hotel, retail and other commercial properties (Class 4) are experiencing an increase of 7.26 percent.

nyc-condo-400 A red flag

A red flag

Before publication, the Department of Finance detected massive errors in the assessment roll and delayed its release. Officially, the Department of Finance cited the need "to correct an error in one of the computer systems it uses to calculate values." But insiders report that quality control issues were also a factor in the delay. On Jan. 19, 2012—two days late—the Department of Finance published the city's tentative assessment roll, covering more than 1 million separately assessed parcels of real estate.

The New York City Charter grants property owners the right to protest their tentative assessments from Jan. 15 (or the first day following weekends and/or holidays) until March 1. The law authorizes owners of one- to three-family houses the right to contest their tentative assessments until March 15. The protests must be filed during these time periods with the New York City Tax Commission, an independent city agency authorized to review and correct the Department of Finance's property tax assessments.

In announcing the delayed assessment release, Finance Commissioner David M. Frankel stated that "we will keep the roll open for an additional two days this year." The Tax Commission's legal authority to review protests filed after March 1 and March 15 is questionable, however. In the absence of remedial legislation expressly authorizing the Tax Commission to review protest applications filed after March 1 and March 15, applicants are better off assuming that the current statutory filing dates will continue to govern.

Commercial consternation

During the period after the publication of the tentative assessment and prior to the publication of the final assessment roll on May 25, the Department of Finance is permitted to increase assessed values of nonresidential properties. This authority may only be exercised until May 10, however, and only where the department has mailed written notice to the owner at least 10 days prior to May 10. The mailing of such notices after Feb. 1 extends the protest period for affected owners, who have 20 days after the notice was mailed to apply for a correction of their assessment.

In Frankel's announcement, he also mentioned that the Department of Finance is reviewing whether thousands of properties which have historically enjoyed not-for-profit exemptions remain eligible for such benefits. Previous exemptions for many properties which did not file timely renewal applications prior to Nov. 1, 2011, were removed on the tentative assessment roll, but Frankel advised that these properties can still regain their exemptions for the 2012-2013 tax year if they provide the required documentation by Feb. 13.

Joel Marcus This email address is being protected from spambots. You need JavaScript enabled to view it. is a partner in the law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel.

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New York Property Tax National Real Estate Investor Joel Marcus

May

Tax Grab: Are New York Assessors Inflating Values for the Wrong Reasons?

Published Property Tax Articles

"The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor, April 2011

The New York City real estate community has been through the wringer since 2007. It has endured a dearth of major property transactions, suffered through the meltdown of the financial services industry and watched available debt financing evaporate. Lenders and special servicers are more in control of the real estate market than ever before.

In the real world of property ownership and development, many taxpayers are experiencing a drop in occupancy for office, hotels and rental apartment buildings. Condo sales have slowed to a trickle and construction of new office, hotels and apartment buildings has come to a virtual standstill.

In this environment of dropping office rents, condominium fire sales and increasing costs of operations, real estate taxes — the largest component of a building's expenses — have skyrocketed. Why is this happening?

New York City satisfies its budget needs through a variety of taxes, and of all of them, the real estate tax is the most important and durable. The city now finds itself facing a cutback in state and federal aid and has big budget deficits. This is happening at a time when corporate and personal income taxes and sales taxes have declined, and other taxes such as transfer and mortgage-recording taxes have all but disappeared.

The city's revenue options are few. People and businesses can move to New Jersey or other areas to escape New York City's income taxes or sales taxes, and this puts a practical limit on what New York City can extract. Real estate, however, is stuck in New York City and can't escape the city's tax grip.

Excessive taxes erode equity.

The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation.

A snapshot provided by the City of New York Department of Finance highlights some of these amazing hikes in estimated market value. In Queens, for instance, assessors raised the market values for cooperatives 32.37% (on average12.05% citywide) from last year and Queens luxury hotels experienced a 27.97% increase as well. Manhattan luxury hotels underwent a 14.82% raise in values, while values climbed 9.65% for cooperatives and 15.91% for condominiums.

Many in the commercial real estate industry believe that the jump in assessed real estate market values is related to the city's budget woes, rather than to actual changes in the market place. The city vociferously denies this notion, but as Shakespeare's Hamlet said, "The lady doth protest too much, methinks."

How much tax is too much?

An analysis of the city's system for assessing properties shows that in office and other commercial properties the property tax bite consumes almost 34% of a property's pre-tax net income. Let's examine with this hypothetical example the formulas used by assessors.

An office building charges $45 rent per sq. ft. Its operating expenses are $12 per sq. ft., and its amortized leasing and tenant expenses are another $4.50 per sq. ft. Therefore the pre-tax net income is $28.50 per sq. ft.

The city divides that income by 13.64%, which is derived by adding a 9% capitalization rate to 4.64%, or 45% of the 10.312% tax rate. That yields a fair market value of $209 per sq. ft.

Assessed at 45% of fair market value, the result is a tax assessment of $94 per sq. ft. and a tax bill of $9.70 per sq. ft., based on the 10.312% tax rate. Therefore the city is a partner in 34% of the net operating income without any equity investment at all! This is before debt service, depreciation and capital improvements are accounted for — expenses that only the owner has to pay but for which the owner gets no credit from the city. Not bad if you can get away with it.

For apartment buildings, the pattern is even more egregious. If rents are $45 per sq. ft. and expenses are $12 per sq. ft. as in the office example, the assessor takes 45% of the 13.353% Class-2 tax rate (which is 6.009%) and adds a 7.5% cap rate to get a loaded cap rate of 13.509%. Divide the cap rate into the net operating income of $33, and the fair market value is $244.28 per sq. ft.

The assessment, therefore, is $110 per sq. ft., and this applies to the tax rate results in annual taxes of $14.69 per sq. ft. That's 44.5% of the property's pre-tax net income. Boy, what a deal the city has! If major capital repairs are needed for such expenses as the facade or elevator modernization, a roof or an apartment makeover, they are borne solely by the owner. None of these expenses are factored into the city's formula.

Property owners can always appeal their assessments, but many believe that it's the city's policy on taxes instead, that needs a reassessment.

MarcusPhoto290 Joel R. Marcus is a partner in the law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Joel Marcus New York Property Tax National Real Estate Investor

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