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. 

Lawmakers have the opportunity to transform onerous tax mechanisms into programs that boost affordable housing development.

Together with high rent and exorbitant property values, the real property taxes that fund necessary services in New York State make housing affordability a significant concern for low- and middle-income residents. To ensure a sufficient supply of affordable housing, the state must address the ad valorem levy, whereby taxes derive from a property's market value.

This article examines the critical interplay between New York's property tax policies and housing affordability. While some taxing mechanisms hinder the development and availability of affordable housing, adjustments and a few additions to those practices have the potential to promote the affordable sector.

Exemptions, Incentives

New York's real property tax system supports a complex framework of entities that rely significantly upon property tax levies to generate revenue and fund their budgets. Property taxes, assessed at the local level, support essential services such as public schools, police, libraries, highway departments, fire districts, open space preservation, out-of-county college tuition and the New York State Metropolitan Transportation Authority, among others.

To encourage the development of affordable housing and ease the burden that real property taxes can impose on developers and owners in the sector, New York offers several tax exemptions and incentive programs. Availability and benefits for some of the programs vary depending on a project's location.

One such option for developers is the 421-a Tax Incentive Program, also known as the Affordable New York Housing Program. Aimed at developers of new-construction multiunit housing, the program can provide full property tax exemptions during construction, followed by a graduated phase-in to normal taxation once the project is completed. In exchange, applicants must reserve a portion of the units to rent at affordable rates.

Another option, originally enacted by the federal Tax Reform Act of 1986, is the Low-Income Housing Tax Credit Program. This gives state and local agencies the authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Developers receiving these credits can then sell them to investors, generating equity for the project and reducing their need for debt financing. While this may not be a direct property tax exemption, it can significantly promote the financial feasibility of affordable housing developments.

A third initiative was created by The Housing Trust Fund Corp. as a subsidiary public benefit corporation of the New York State Housing Finance Agency. It provides funding to eligible applicants to construct low-income housing or to rehabilitate vacant, distressed, or underutilized residential or non-residential property to residential use for occupancy by low-income individuals. These funds often come with property tax exemptions or abatements, reducing operating costs for affordable housing providers.

In addition to these broad exemptions, individual homeowners may qualify to ease high property tax costs via incentives such as the School Tax Relief Exemption or exemptions for senior citizens, veterans, people with disabilities, clergy, and certain agricultural properties, among others. A property tax professional can help developers or homeowners determine what programs are available to reduce the tax burden for their property.

Challenges, Criticisms

Despite the evident benefits these programs bring to communities, critics argue that property tax exemptions can create inequities in the tax system. Large developers might benefit disproportionately from programs like 421-a, for example, while smaller property owners bear a more significant tax burden. Additionally, critics argue that tax-abatement-based programs fail to address other challenges that impede the creation of new affordable housing. Affluent neighborhoods, for instance, often resist new affordable housing projects, thwarting development efforts and perpetuating socioeconomic divides.

Administering property tax exemptions and deciphering potential incentives can be complex and burdensome. Developers must navigate convoluted application processes and compliance requirements, which can delay projects and increase costs. Local governments also face challenges in ensuring proper implementation and monitoring of these programs. Real or perceived complexities associated with application processes for permitting, financing and incentives often constitute a barrier in themselves, discouraging developers from undertaking new affordable housing projects.

Ongoing underserved renter demand for affordable housing suggests the current assortment of incentives is failing to achieve the desired outcome, which is to ensure an adequate supply of affordable housing. Rising construction costs, limited availability of suitable land, and community opposition exacerbate this imbalance, resulting in a persistent gap between the number of affordable units needed and those available.

A Call to Action

New York lawmakers have the opportunity to boost affordable housing efforts by enhancing the effectiveness of property tax policies that promote the sector. Simplifying the application and compliance processes for tax incentives would be a significant first step that would encourage more developers to participate.

Following on the theme of simplification, the state should consider creating a centralized information hub with dedicated support for all development incentives. This would give developers a single resource to help them navigate the bureaucratic landscape and complete new affordable projects successfully.

Answering the call for more affordable housing will require more than tax abatements, however. Leaders must find ways to increase funding for affordable housing programs. Additionally, offering low-interest loans, grants, and technical assistance to non-profit developers would enhance their capacity to deliver affordable units.

New York State's real property tax system plays a crucial role in shaping the affordable housing landscape. While current tax exemptions and incentive programs provide some essential support, challenges remain in achieving equity, efficiency, and adequate supply. By refining these policies and addressing systemic issues, New York should be able to make significant strides toward ensuring that affordable housing is accessible to all its residents.

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.

New York Court of Appeals rejects lower court decision, affirms that occupiers obligated to pay property tax have the right to protest assessments.

In a far-reaching decision, New York's highest court has affirmed the rights of tenants under a commercial net lease to protest assessments and reduce their real property tax burden. The ruling reversed a State Supreme Court dismissal of a petition on the grounds that only a property's owner can file an administrative grievance with the Board of Assessment Review.

In a net lease, the tenant is responsible for paying real estate taxes and other expenses stated in the lease. In The Matter of DCH Auto vs. Town of Mamaroneck, the Court of Appeals in June 2022 published a unanimous decision stating that tenants contractually obligated to pay real estate taxes and authorized to protest assessments may file tax appeals even when they do not hold title to the underlying real estate.

Restoring a precedent

DCH Auto operated a car dealership in a net leased property in Mamaroneck, New York. Its lease with the owner required DCH to pay the property's real estate taxes in addition to rent.

Commercial tenants with this type of lease commonly file tax appeals to correct excessive tax bills and mitigate operating costs. These occupiers include retailers such as department and big-box stores, office building users, banks, drug stores and other businesses.

In the subject lease, DCH had the express right to challenge the subject tax assessment. Pursuant to the statute, it filed an administrative grievance with the town's Board of Assessment Review. The Board denied the challenge, after which DCH petitioned for judicial review.

The town moved to dismiss, arguing that the petition was invalid because the incorrect party had filed the administrative grievance before the Board of Assessment Review. They alleged that the failure of the property owner to file the administrative appeal precluded judicial review of the board's determination.

The lower court agreed and dismissed the petitions on the ground that only a fee owner may file the initial grievance complaints under the New York statutory scheme. The State Supreme Court's Appellate Division, Second Judicial Department, affirmed the petition's dismissal.

Thus, in one fell swoop, the Appellate Division obliterated over 100 years of precedent, which held that a net lessee that pays the real estate taxes is a proper party to file an administrative complaint challenging the assessment. Prior to the DCH lower court decision, it was never disputed that a net lessee was a proper complainant for filing both an administrative complaint and judicial petition. The lower court's ruling effectively required absentee property owners – who do not pay the real estate taxes and have no skin in the game – to file an administrative appeal before a net lessee can file a judicial petition.

The Appellate Division decision placed in jeopardy thousands of real estate tax assessment appeals filed by commercial net lessees who have relied upon common, accepted practice and precedent, and interposed an owner standard where none is present in the plain terms of the relevant statutes.

Fortunately, the Court of Appeals reversed the lower court's decision.

Who's who?

The case turned on statutory interpretation and analysis of legislative intent. At issue was Section 524(3) of the New York Real Property Tax Law (RPTL), which sets forth the process for the review of real property tax assessments. The provision specifies that an administrative complaint must be made by "the person whose property is assessed." If a complaint is denied, then "any person claiming to be aggrieved" can file a judicial appeal pursuant to Article 7 of the RPTL.

The Town of Mamaroneck's position was that the property owner must file the administrative complaint before any aggrieved person can challenge the result in court.

The Court of Appeals held that DCH and all commercial net lessees with the right to challenge assessments are included within the meaning of "the person whose property is assessed" under RPTL Section 524(3).

In its decision, the Court of Appeals considered the text of the statute and noted that "a person whose property is assessed" is not defined. A comprehensive review of the legislative history ensued, beginning with an analysis of the initial text of the statute as it existed prior to 1896. The original statute permitted "any person" to file an administrative complaint. In 1896, lawmakers amended the wording to "a person whose property is assessed." The Court examined the record, cited the New York State Commissioners of Statutory Revision that addressed the change in 1896, and noted that "there is no change of substance" with the revised wording.

In reversing the lower court's action, the Court of Appeals based its decision upon the evolution of the statutory text and the consideration of the underlying legislative intent. The Court made clear that it was not the legislature's intent to limit the meaning of "a person whose property is assessed" to the owners of real property, and that the reference includes net lessees contractually obligated to pay the real estate taxes.

Notwithstanding the DCH decision, commercial net lessees should ensure their tax appeals are not challenged by making certain that their right to file a tax appeal is clearly stated in their lease.

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.

Simultaneously protesting an assessment and a government taking can put taxpayers in a quandary.

There are multitudes of ways for property owners to reduce their tax burdens, as well as missteps that can derail a tax strategy. With that in mind, taxpayers should beware of trying to prove a low value for a tax appeal while simultaneously claiming a higher value in another proceeding. And here is how it can happen.

Protesting a high assessment

Most real estate taxes in the Northeast -- including those in New York, Pennsylvania, Connecticut and Massachusetts -- have an "ad valorem" or "value-based" assessment method. Thus, the greater a property is worth, the higher its real estate tax burden. A property tax bill is calculated by multiplying the property assessment by the tax rate. The assessment or taxable value is determined by the local assessor or board of assessors and is typically a percentage of market value.

This percentage varies among states and even municipalities. In New York, it is based on a comprehensive analysis of sales. The percentage is released annually by the state's Office of Real Property Tax Services and is different for each municipality. Connecticut sets its percentage by statute. In Pennsylvania, it is set by the state's Tax Equalization Board. But regardless of the state or method, local statutes fortunately allow property owners to reduce their real property tax burden by protesting the assessment they receive.

To successfully appeal a tax assessment, property owners must file a tax appeal and conclusively prove a lower market value. There are a few accepted ways to do this, namely the sales comparison, income capitalization, and cost approaches to determining value. No matter which method is used, the calculation must value the property according to its actual use and condition as it existed on a specific date in the past. New York designates this as a taxable status date and most states use the same or a similar term.

Asserting a higher value

The "actual use and condition" guideline in setting taxable value stands in stark contrast with condemnation and eminent domain guidelines, which value property when it is taken for a public purpose. In that scenario, the property must be valued according to its highest and best use, regardless of how the property is actually being used.

When the government takes private property for a public purpose, it must compensate the owner for the damages to the property's most valuable use. This valuation standard is known as "highest and best use," and has a specific meaning in the appraisal and eminent domain world.

According to the Appraisal Institute's reference text, "The Appraisal of Real Estate," and a multitude of state and federal court cases, the highest and best use of a property must be (1) physically possible, (2) legally permissible, (3) financially feasible, and (4) maximally productive. A taxpayer building a case for maximum value will typically need a lawyer, along with an appraiser and/or engineer, to evaluate these four categories for the specific property, look at the range of uses that qualify under each of those categories, and then conclude which use will result in the highest market value.

For example, a vacant, five-acre, commercial-zoned parcel of land on Madison Avenue in New York City would not be valued as vacant land, but as whatever its maximum use could have been, such as an office building.

At crossed purposes

There can be a serious conflict between the two guidelines when there is a partial taking, such as when a government takes a strip of a larger tract for a road widening, during the pendency of a tax assessment appeal on the larger property. The conflict can arise when the property's highest and best use happens to be its present use and condition.

In that scenario, a property owner is in the difficult position of claiming a low market value for the tax assessment proceedings and claiming a higher market value during the condemnation proceeding. When that happens, the taxpayer's team must perform an analysis to determine which proceeding will potentially result in the greatest benefit to the owner.

A good rule of thumb would be to withdraw the tax appeal and concentrate on the eminent domain claim. This is because for condemnation, the damage has occurred on a single date (the date of the taking). Tax appeals, on the other hand, are filed annually, and market values can change from year to year. A wise petitioner would proceed with a tax appeal only after the eminent domain claim is concluded.

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

​Due diligence is required to determine whether possible tax increases can be abated.​

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75% of its workers, Wells Fargo raising its minimum wage by 11% and other companies sharing some of the increased profits with employees.Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly, command higher rentals for the same space.

The real property tax systems in place for most states are based on an ad valorem (Latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements which do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expansion or construction which alters the layout of a property can – and usually does – result in an increased property assessment. Since real estate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in Year 2 there will be a 45 percent exemption, 40 percent in Year 3 and so on.

Most other states have similar programs to encourage business investments and new commercial construction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities. For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from real property taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special-purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia, Pennsylvania, enacted a 10-year tax abatement from real estate taxes resulting from new construction or improvements to commercial properties. Similarly, the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program, Enterprise Zones and others.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase‑in provisions depending on whether it is in a metropolitan or non‑metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.

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.

''While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses"

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, 2017, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75 percent of its workers, Wells Fargo raising its minimum wage by 11 percent and other companies sharing some of the increased profits with employees. Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly,command higher rental rates for the same space.

The real property tax systems in place for most states are based on an ad valorem (latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements that do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expans1on or construction that alters the layout of a property can -and usually does -result in an increased property assessment. Since realestate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Tax Exemptions Available for Property Improvements

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in year two there will be a 45 percent exemption, 40 percent in year three and so on.

Most other states have similar programs to encourage busmess investments and new commercialconstruction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities.For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from realproperty taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special­ purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia enacted a 10-year tax abatement from realestate taxes resulting from new construction or improvements to commercial properties. Similarly,the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program and Enterprise Zones.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase-in provisions depending on whether it is in a metropolitan or non-metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.