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Property Tax Assessments Spiral Out Of Control In New York

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.

JoelMarcusJoel 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..

New York Tax Uncertainty

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."

JoelMarcusJoel 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..

New York City Assessors Elevate Forms over Substance

"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.


JoelMarcusJoel 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..

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

"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-400A 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 MarcusThis 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.

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

"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.

MarcusPhoto290Joel 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..

New Taxman Tightens the Screws

"[David ] Frankel is exploring ways to make property tax more transparent, easier to understand and fairer... ."

By Joel R. Marcus, Esq. - as published on Globest.com , January 22, 2010

New York CITY Mayor Bloomberg's recent appointment of David Frankel as the new commissioner of finance will result in significant changes at the Department of Finance. Frankel's priority calls for aggressive pursuit of companies and individuals who do not pay the correct amount of taxes or avoid paying taxes altogether. His goal is to level the playing field so that tax avoiders lose their competitive advantage over the vast majority of other law abiding taxpayers.

Frankel, a seasoned Wall Street professional, signaled in his first briefing to industry groups this fall, a number of changes he would make at his agency. He announced several key personnel changes and has reorganized the management structure so that only a few of the 24 department heads report directly to him.

He announced plans to hire 29 new auditors and picked a former Assistant US Attorney as his new general counsel. The auditors will use new databases and software tools to look for inconsistencies in tax receipts, income tax filings, data on licenses and permits, and to review the findings of other audits conducted by all levels of government, including State and Federal. However you feel about your taxes, you've got to pay them, said Frankel.

As for policy changes, Frankel is exploring ways to make the property tax more transparent, easier to understand and fairer. As an example of how the tax is confusing, Frankel noted that it would be simpler if the city-taxed properties on full market value instead of assessed value at 45%.

For residential housing, he expressed an interest in exploring the idea of valuing small houses (Class 1) and cooperatives and condominiums (Class 2) with the same sales method. He would consider moving away from the methodology of valuing coops and condominiums as if they were conventional rented housing. Frankel seems sensitive to claims that cooperative housing is underassessed compared to condos.

Since many current policies followed by the DOF are dictated by state law, some of his larger goals may take a few years to realize. The current administration will leave office in four years, so much of his agenda will have to be tackled quickly.

Frankel has identified a number of issues which he believes need attention. One such issue is revising the legal mandate that requires co-ops and condominium housing to be valued on the same basis as conventional rental apartment buildings, which was enabled by Section 581 of the Real Property Tax Law. Another thorny issue revolves around rectifying the astronomical increase in vacant land assessments that happened in the 2009/10 tax year.

The new commissioner has indicated a desire to move the due date of the RPIE (real property income and expense) submission to June 1 from September 1 to allow greater time for the DOF to review the information. In addition, Finance is soliciting on a voluntary basis, income forecasts from property owners to enable the Department to predict possible reductions in market values in future years.

One change just implemented by the DOF involves a new procedure for the taxation of generators and other equipment. Where the owner of the building and equipment are the same, the equipment will be valued based on the cost approach (reproduction cost new less depreciation). However, where appropriate, it will be valued on its rental income for established buildings, and that income should be included in the RPIE statement. For tenant owned equipment, generators will be taxed and assessed directly to that tenant, and the generator will have its own assessment identification number and its value will be calculated on the cost approach. For many years, much of this type of property was not taxed separately, if at all.

Frankel noted that the department was looking at a number of ways to more accurately reflect the recent downturn in market values for the new assessments. How many of his goals and initiatives will be realized over the next four years still remains unclear. The ability to enact major legislation aimed at real property tax reform has stymied each of his immediate predecessors because of the financial and political impact on residential taxpayers.

However, you can count on one thing for sure: a new approach to administering and collecting taxes is going to take place at the DOF, starting with more review and enforcement of tax liabilities. If you are not paying your fair share of taxes, beware: the Taxman is lurking.

MarcusPhoto290Joel 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, the national affiliation of property tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

Trouble Coming in 2010 Assessments

"Tax assessors usually remain behind the curve of market trends."

By Joel R. Marcus ., as published by Real Estate New York, November/December 2009

All New York City property will be revalued on Jan. 5, 2010. Although that date is not yet here, rest assured that trouble awaits commercial property owners in this revaluation.

First of all, tax assessors usually remain behind the curve of market trends because the Real Property Income and Expense form requires mandatory filing of income and expense statements, which show only the property's calendar year 2008 performance. Since the market fell off a cliff after September 2008, these operating statements don't demonstrate the dramatic loss in real estate value.

Adding to the burgeoning taxes is the five-year phase-in of actual assessments mandated by New York law, whereby each increase over the past five tax years is added to the transition assessment or taxable assessment in 20% increments. Therefore, even if the actual assessment remained the same or was lower, the transition assessment, to which the tax rate is applied, would still reflect the impact of the prior five years' increases.

Hotels took the worst hit in the recession, suffering a 50% decline in earnings. The horrible expense ratio they now exhibit compounds their plunging profits. Instead of expenses approximating 70% of income, hotels find that costs may equal or exceed gross room revenue.

To create property tax assessments, the city employs a gross income multiplier, which ignores actual expenses. While the occupancy of many hotels has decreased along with their room rates, they still have to provide a level of service, staffing and other expenses that leaves marginal hotels or properties operating in the red. Hotels may find some degree of relief because the Tax

Commission has expressed a willingness to consider expenses in setting tax assessments. However, even here the old 70% ratio method has more traction with the tax authority.

Owners of condo properties with many unsold units find themselves in a tough bind. Condos do not generate rental income and sales are at a virtual standstill, yet condos are valued as if they were rental properties. This squeeze of higher property taxes and little income throws owners into the hands of their lenders.

Since rental income from conventionally rent-producing apartment buildings has only declined 10% to 15%, not much relief in tax valuations can be demonstrated by objective calculations. Moreover, data from luxury rentals is also derived from the 2008 calendar year filings, which, as mentioned, are not yet showing the full measure of market fall-off. Often, too, the burnoff or expiration of abatement programs significantly raises taxes.

Office and other commercial properties will show their decrease in income more slowly because the 10-year lease, which is most common, often masks the drop in fair market rental value. The only reduction seen in the market comes from increasing vacancies and renewals at lower rents. The impact of reduced rents, loss of operating and tax escalation income associated with the signing of a new lease and establishment of a new base year will not be fully realized for several years. In the meantime, income statements mask the problem by showing lease cancellation income and, in the case of new leases, the straight-lining of free rent and the amortizing of leasing commissions and tenant work.

To bring real estate taxes down to a viable level, a difficult task even in normal times, owners will need sophisticated analysis and effective presentation. A compelling presentation to the assessor regarding the rise in capitalization rates is paramount.

Hotels need accurate data to reflect current conditions, including labor and staffing requirements. They must also show the assessor how the increase in new rooms and new hotels precipitates lower rates and higher vacancies.

Condos need to create valuation models using realistic market conditions, high capitalization rates and a broader mixture of comparable assessments and data. Showing condo price reductions will not prove your case.

Office and commercial properties must clearly demonstrate the lack of any net absorption of space, indicating a 15% vacancy and loss factor in a 100% occupied property. In addition, any large vacancy is likely to be sustained for the foreseeable future, thus, the need for downward adjustment of occupancy.

MarcusPhoto290Joel 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, the national affiliation of property tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

Be On Guard over Shift to GIM

"The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

By Joel R. Marcus, Esq., as published by Real Estate New York, April 2008

The Tentative Assessment Roll for 2008/2009 demonstrates a significant shift in assessments for class 2 properties (rented apartment buildings, cooperatives and condominiums). This is due to the New York City Department of Finance abandoning the time-honored approach of net income capitalization in favor of the gross income multiplier (GIM) approach, which for the very first time ignores age, condition, location and expense factors. The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

Different Methods, Different Results

First, what are the differences in the past and present methodologies and where are the pitfalls in adopting one formula over another? Net income capitalization has been used by assessors and endorsed by New York State courts for more than a century. In 1962, the New York Appellate Division ruled that value arrived at by capitalization provides the surest ground for sound appraisal. In an earlier case, the New York Court of Appeals determined that: "the net income of a property is more persuasive evidence of what a property is worth than using a sales price derived from a similar property. What an investor will pay for a property is measured in large part by the amount and certainty of the income that can be obtained."

The Finance Department provided two reasons for renouncing the capitalization approach: 1) expenses for some buildings were higher than others leading to lower assessments, while in some cases the expenses may have been overstated by the owner. 2) using the GIM eliminated the need to study expenses or expense ratios and offered a simpler, more predictable one-step method.

While GIM offers more predictability, it fails to provide more accuracy. GIM is not seriously employed by any major developer, investor, lender or appraiser today, nor has any New York court embraced it.

In the most recent edition of its handbook, the Appraisal Institute warned appraisers to be careful when using this GIM method. The handbook cautions that all properties used as a basis for this approach must be comparable to the subject property and to one another in terms of physical, location and investment characteristics. If properties have different operating expense ratios this method may not be comparable for GIM valuation purposes.

The GIM approach presents one overriding problem. It is applied to all residential property regardless of location, age physical conditions or the level of services. Also, using GIM throws retail rents, antenna, signage or health club income into the mix, thus, offering the distinct possibility of grossly inaccurate and unfair assessments for many types of properties.

In addition, many substantial valuation disparities occur due to factors such as rent controls, rent stabilization and complexes composed of a large group of buildings. There may be substantially different expense ratios for an aging multi-building housing complex and a 100-unit, mid-block, non doorman apartment house in the West Village. These differences generate unfair tax assessments.

Legal Flaws in GIM

Initially, the Finance Department used different GIMs depending on income level and whether the property is rental, co-op or condominium. This directly violates state law, which mandates that these properties must be assessed uniformly. Therefore, the New York City Law Department ordered Finance Department to make changes; co-ops and condominiums had their assessments lowered and rentals saw their assessments increase.

The fact remains that for all rent-producing properties, the city possesses detailed real property income and expense information from legally mandated filings, and requires detailed statements by CPAs in all but the smallest assessment challenges. This surely provides a database for accurate net income capitalization and takes into account location, condition and other significant factors which ordinarily would render GIM suspect.

As the Finance Department begins to use the GIM to derive property tax assessments, owners need to be on guard against property tax increases. When these increases appear, an owner's only defense is filing a property tax appeal. Income capitalization may be down, but it is not out.

MarcusPhoto290Joel 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 can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

ICAP Would Trim Developers' Incentives

Under the proposed ICAP legislation, retail facilities benefits would be dramatically reduced

"Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2008

The Industrial and Commercial Incentive Program is New York City's largest commercial real estate incentive program, with approximately 15,000 applications filed since its 1984 inception. KIP provides partial real estate tax exemptions for new and renovated industrial and commercial buildings in most areas of the city. While the program's renewal seems certain, it's likely to undergo significant legislative revisions.

Critics contend that lClP operates at a substantial fiscal loss for the city, with approximately $371 million in real estate tax revenues foregone in 2006 alone. The city demands reforms to the current ICIP. Specifically, they want to restrict benefits to commercial and manufacturing buildings in geographic areas that truly require special real estate tax incentives to encourage construction, stimulate employment and foster significant new economic activity. Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged. In the proposed legislation, three elements are particularly noteworthy:

1. Abatement vs. Exemption

The current IClP offers tax exemption for new and renovated buildings based upon building assessment increases directly attributable to construction, i.e. "physical increases" described in the application. Industrial and commercial buildings located in special exemption areas also qualify for exemption from assessment increases arising from inflation or market value appreciation, i.e. "equalization increases." It appears ICIP amendments will provide a tax abatement rather than an exemption. For that reason, the revised legislation is generally referred to as the Industrial and Commercial Abatement Program. While exemptions reduce the amount of assessment subject to real estate taxation, abatement's are tax credits that directly reduce tax liabilities imposed upon the property. A project's abatement base will reflect the difference between the assessed value of the completed building and 11 5% of its pre-construction assessed value.

2. Reduction of Retail Eligibility

Under the proposed new lCAP legislation, benefits for retail facilities would be dramatically reduced and would depend upon the type of project and its location. Critics of KIP contend that new retail facilities frequently displace sales from existing locations in the city rather than create new economic activity. Retail space within newly constructed or renovated commercial buildings in Manhattan south of City Hall would remain eligible for [CAP benefits. Commercial buildings in Manhattan between City Hall and 59th Street would not be eligible for abatement benefits on any retail space greater than 5% of the total floor area. In regular commercial benefit areas, retail space in excess of 10% of the building's floor area would not qualify for abatement benefits.

3. Reduction of Eligible Construction Period

The old ICIP program called for commercial or industrial construction work to be performed between the date the first building permit is issued and the sixth taxable status date (Jan. 5) there after. Failure to meet these construction benchmarks would not mean denial of benefits but merely serves as a cap on the exemption base.

Under ICAP, owners generally would have to complete new buildings within five years of the permit date and renovation projects within two years of the permit date. Failure to complete construction within these periods would mean revocation of all abatement benefits granted from inception. The abatement base would be limited to physical assessment increases within three years after the permit date for new buildings and one year after the permit date for renovations. ICAP would reduce the lClP construction period from almost six years to one to three years, depending upon whether the project is a new or renovated structure. Clearly, ICAP offers far less generous benefits than those available under KIP. To capture lClP benefits, owners must 1) file a preliminary application with the New York City Department of Finance prior to June 30,2008 and 2) obtain a building permit no later than July 31,2008. These dates are critical if owners want to qualify their projects under IClP rather than ICAP.

MarcusPhoto290Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an 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..

421a Changes Increase Property Taxes

By Joel R. Marcus, Esq. as published in Real Estate New York, December 2007

The new law also curtails exemption benefits for as-of-right areas

"The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens."

On Aug. 24, Gov. Eliot Spitzer signed into law three bills that dramatically revamped New York City's 421a exemption program. The program was created in 1971 to encourage the construction of new multifamily dwellings by granting a partial exemption from increases in real estate taxes resulting from the new residential construction.

The new law compared to the old law. The previous law covered only projects commend prior to July 1,2008 and made 421a benefits available in any area of the city, except for those areas identified as geographical exclusion areas. The areas not classified as exclusion areas are commonly called "as-of-right' areas. The exclusion areas generally included portions of Manhattan between 14th and 96 th streets and the Williamsburg-Greenpoint areas of Brooklyn. Projects qualified for benefits in the exclusion zones if at least 20% of the units were created as affordable housing or if the developer purchased negotiable certificates for creation of affordable housing units off-site.

The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens. Projects started between July 1,2008 and Dec. 27,2010 in these areas qualify for benefits only if at least 20% of the building's units are affordable to families whose income at initial occupancy doesn't exceed 60% of the area median income.

The new law reduces 421a benefits outside the exclusion zones. The controversy surrounding the new citywide exclusion zones may obscure the fact that the new law dramatically curtails 421a exemption benefits for as-of-right areas.

Under the old law, all assessment increases in excess of the pre-construction assessment, commonly known as the mini-tax, were exempt. Under the new law, benefits for as-of right projects are restricted to the first $65,000 in assessed valuation per dwelling unit. The cap increases by 3% each year, beginning in 2009/10. For the current tax year, the cap is equal to $7,750 in actual taxes per unit ($65,000 x 11.928%).

The new law also dramatically reduces tax benefits for nonresidential space in new multifamily dwellings. Under the old law, up to 12% of the building area could be used for commercial purposes, without loss of exemption. Developers often incorporated valuable retail space in their buildings to lease at market rates while enjoying full 421a exemption benefits. Under the new law, all commercial space in a building is considered one unit and is subject to the $65,000 exemption cap, greatly reducing the tax break for commercial space.

To demonstrate the effect of the exemption cap, consider a new 100,000-sf condominium building with 100 dwelling units and one retail unit constructed in an as-of-right area. The building includes 12,000 sf of retail space and carries a $100,000 mini-tax. The completed building is assessed for $1 5 million. Under both the old and new laws, the project would qualify for a 15-year exemption benefit.

Under the old law, taxes during the construction period and for the first 11 years after completion equaled the mini-tax multiplied by the tax rate. Assuming that the 2007/08 tax rate of 11.928% remains in effect, annual taxes for the entire building would equal $1 1,9280 approximately $118 per residential and retail unit. The exemption would not be affected by the retail space as it does not exceed 12% of the building's floor area. Under the new law, taxes for the entire building, including the retail space, would still be the same mini-tax ($100,000) each year during construction. However, for the first 11 years after construction is completed, the 101 - unit building would be subject to the exemption cap, as adjusted. For the first year, only $6,565,000 (101 units x $65,000) of the building's $15-million assessment qualifies for exemption. Taxes for the fiat year of the benefit period would exceed $1 million for the building or approximately $9,960 per residential and retail unit, a 1,000% increase. The new law will likely affect the feasibility and pricing of all new projects.

MarcusPhoto290Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an 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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