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Property Tax Resources

Mar
26

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.

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May
18

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..

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Apr
18

Real Estate and the Yankees

Why Hotels and Nursing Homes Prove Especially Vulnerable to Inaccurate Taxation

"The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate."

By Elliott B. Pollack, Esq., as published by Commercial Property Executive, April 2011

Tax laws across the United States typically prohibit assessors from including intangible assets such as good will, franchise value or business value in a property tax assessment. Only tangible real and personal property may be placed on assessment rolls. But taxpayers and assessors alike sometimes have difficulty differentiating between tangibles and intangibles.

That's understandable on the part of taxpayers who may need to include intangibles in their calculations when buying or selling a hotel, nursing home or assisted-care property. For purposes other than property taxes, intangibles often are part of a property's overall value. Indeed, rivers of ink in appraisal and valuation literature—not to mention judicial rulings— have been devoted to the issue of intangibles.

Unfortunately, many assessors don't fully understand how to exclude these non-taxable elements from their calculations, either. For the unwary property owner, the resulting overassessment can result in an equally overstated tax bill. One way to gain a clearer perspective on the degree to which intangible assets can affect value is to turn our lenses on another field entirely—a baseball field, in fact. On Nov. 10, 2010, sports columnist Richard Sandomir presented an illuminating look at the talents of the New York Yankees' redoubtable shortstop, Derek Jeter, in an article for the New York Times. "The Yankees would not quite be the Yankees if (Derek Jeter) suited up with another team," Sandomir noted. The writer contended that Jeter adds substantially to the Yankees' overall value, much in the same way, it can be argued, that a respected brand boosts the worth of a hotel. Without Jeter's headline-grabbing performances, the team would be less valuable, just as an unflagged hotel is likely to be less valuable than its branded competitor. Sandomir quoted a business consultant who observed that Jeter's playing, were he less celebrated, might be worth $10 million a year. But as an iconic draw for ticket sales, Jeter's value to the team is closer to $20 million each year. The Yankee captain's "value as a brand builder," the expert noted, not merely as a hitter or infielder, is what drives his intangible worth differential, again, very much like the business value inherent in a well-managed hotel or convalescent facility.

With Jeter's lengthy contract concluded, it would be foolish for the Yankees not to sign him up again as he enters free agency, even though his baseball skills have eroded, the expert opined. The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate.

After years of resistance from taxpayers and their attorneys, it seems taxing authorities in the United States are getting the message about intangible assets. It now appears that the majority of assessors recognize that the net operating income generated by a hotel, as an example, does not result exclusively from its real estate value. In fact, the management expertise—which drives revenues from non-occupancy hospitality services such as food service, special events and recreation revenues—is an asset independent of and severable from the real estate itself.

Similarly, the intensive services furnished to the patients of long-term-care convalescent facilities are distinct from the property in which those services operate. Indeed, nursing and medical care, meals and rehabilitation produce revenues that have little to do with the real property and should not be capitalized when the health-care facility is valued using an income methodology.

There is case law to provide examples of the correct way to value commercial real estate without inflating taxable value by rolling intangible assets into the equation. Taxpayers interested in doing a little research will find one court's approach toward the separation of intangibles and the valuation of health-care real property in the case of Avon Realty L.L.C. v. Town of Avon, decided in 2006 by the Superior Court of Connecticut, Judicial District of New Britain. In that case, the owner of the Avon Convalescent Home, a 120-bed skilled nursing facility, appealed an assessed value in excess of $5 million on the grounds that the assessor hadn't deducted sufficient value attributable to intangible assets from the business's overall value. Upon review, the court deemed the value to be a little more than $4 million, supporting the taxpayer's appeal.

A thorough understanding of the issues and methodologies involved in properly differentiating and valuing tangibles and intangibles marks the difference between fair and excessive property tax assessments for hotels, nursing homes and assisted-care facilities.

 

Pollack_Headshot150pxElliott B. Pollack is chair of the property valuation department of the Connecticut law firm Pullman & Comley L.L.C. He cautions that he is an avid Boston Red Sox fan. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
15

Mistaken Reform

How Property Tax Caps Increase Your Tax Burden

"Attacks on the property tax continue. Yet as the table indicates, during the past five years, property taxes have risen no more rapidly than the average of the three tax areas.."

By Mark S. Hutcheson, Esq., as published by Commercial Property Executive, October 2010

Complaints about the burden of ever increasing property taxes are a common refrain. Many property tax reform efforts miss the mark, however, and set the stage for greater inequity from misguided attempts to cap valuations.

In New York state, which has seen strong debate over capping property tax growth, the Senate passed a provision to cap property taxes at 4 percent, while several gubernatorial candidates are touting a 2 percent limit. New Jersey recently passed a 2 percent cap on property tax increases. Voters in Colorado, Louisiana and Indiana will consider tax caps or rollbacks this November.

Attacks on the property tax continue. Yet as the table indicates, during the past five years, property taxes have risen no more rapidly than the average of the three tax areas. (Property tax represents 30 percent of all taxes, sales tax 33 percent and personal income tax 22 percent).

Mistaken_Reform_graph

While one of the most popular efforts is to limit or cap increases in taxable property values, this argument diverts attention from more meaningful budget and spending discussions. Texas, for example, has experienced several unsuccessful attempts to restrain value increases as a means of limiting property tax growth.

A report published by the Lincoln Institute of Land Policy in 2008, titled "Property Tax Assessment Limits: Lessons from Thirty Years of Experience," concluded that, "assessment limits are often put forward as a means of combating two problems popularly associated with rapidly appreciating property values: increasing tax bills and the redistribution of tax burdens.

In fact, 30 years of experience suggests that these limits are among the least effective, least equitable and least efficient strategies available for providing tax relief."

Equality of taxation is one of the foundations of a tax system, and sound public policy recognizes that valuation caps are an ineffective limitation on property taxes. The reasons for this are numerous.

Like all artificial limits, a cap creates grossly unequal values within and among different classes of properties. An appraisal cap creates disparities between a property valued at market and another valued with a cap, so that two identical properties are treated unequally. A cap placed on residential shifts the tax burden from residential to commercial property. If both residential and commercial are capped, there will be a long-term shift from commercial to residential, because homes change hands more frequently.

Caps create unfair competitive advantages as well. Properties that lose a value cap—including newly built, purchased or remodeled assets—will be at an economic disadvantage. On the commercial front, where retail and office leasing is highly competitive, new owners that do not benefit from a cap will likely be forced to reduce their profit rather than quote a higher rental rate than competitors. And an investor may decide not to develop in a market where competing properties receive a cap, rather than compete directly with landlords that can charge less rent to make the same profit.

Moreover, caps increase taxes for owners of personal property, and here is why: Caps seldom apply to personal property at manufacturing plants, refineries, chemical plants or utilities, so a cap shifts the tax burden to these types of properties. Typically, local governments raise tax rates to balance the budget shortfall created by the cap on real property. That means personal property taxpayers will pay based on full market value, and at higher tax rates.

There is also a direct effect on land use that can work against personal property taxpayers in a different way. Communities that limit property value increases compete for retail properties that can generate sales tax income. New housing and non-retail properties become undesirable because they provide less tax growth and increase infrastructure demands.

If there is no limit on tax rates, the cap will simply shift the variable in the property tax equation from the property's value to the taxing unit's tax rate. At best, the property owner's tax bill will remain where it was. At worst, the bill will increase significantly if the taxpayer purchases or improves a property, because they will then lose the benefit of the cap and be required to pay at full market value and at a higher tax rate. In 2010, it is painfully clear that a cap impairs a local government's ability to pay for critical services when state and federal revenues wane and local mandates increase. This shifts governmental control from the local level to the state. Caps impair infrastructure development and result in the imposition of a wide number of local fees and charges to replace property tax revenue. Thus, artificial limits on appraised value have unintended negative consequences. Taxpayers and government alike are better served by pursuing more effective and fairer mechanisms for property tax relief.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson L.L.P., which focuses on property tax disputes and is the Texas member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
23

Golf Course Owners Teed Off Over Taxes

"Taxpayers are left to rely on the courts to compel assessors to value golf courses by present use and condition only..."

By Michael Martone, Esq., and Michael P. Guerriero, Esq., National Real Estate Investor, September 2010

A battle is raging in New York and across the country between assessors and taxpayers at odds over the market value of golf courses and their associated membership clubs.

The front lines in this conflict are clearly demonstrated in Nassau County, N.Y., home to 400 overlapping tax districts and a population suffering the highest taxation burden in the state. The recession and nationwide decline in property values for golf courses have pushed many clubs into severe financial straits as thinning rosters force them to lower dues or scrap fees.

Golf_Courses_graph2One prominent Long Island club recently sold to a developer. Another declared bankruptcy, and surviving golf courses are fighting to avoid similar fates. Closures outpace new openings as demand for golf declines and revenue growth remains flat in the face of rising costs especially property taxes.

Exacerbating the tax problem are assessors who turn a blind eye to the economic forces threatening the survival of private clubs, and who instead pay undue attention to alternative land uses. Taxpayers are left to rely on the courts to compel assessors to value golf courses by present use and condition only.

In most all cases a golf course sells for a price that includes its business operation and personal property, but only the value of the real estate may be considered in setting the property tax assessment.

Development factor

Many courses are bought and sold for their development potential, grossly inflating values. Where developable land is at a premium, reliance on comparable sales could tax private golf courses from existence. The cost approach, too, is generally reserved for specialty property.

For these reasons, courts require the assessor to value the private golf course based on its value in use when employing the income capitalization approach. With this approach, a not-for-profit private club is valued as if it were a privately operated, for-profit, daily fee operation.

The courts tend to determine a golf course's income stream by capitalizing the amount a golf operator would pay a property owner as rent for the course. They use this methodology because golf course operators typically pay a percentage of gross revenues as rent. That amount can be capitalized to arrive at a value. The capitalization of golf rent to value is a hotly litigated issue and influences the percentage rent to be used.

 

Conflicting formula

Rents for golf course leases are influenced by differences in tax burdens from one location to the next. Similar golf courses operating under a similar operating basis, yet in differing locations with disparate tax burdens, must be equalized to arrive at a fair and uniform tax value. In a recent case, the court sought how best to keep the influence of high tax burdens from unfairly distorting value.

In that case, the assessor preached the application of an ad-hoc, subjective adjustment to the percentage rent to reflect a greater or lesser tax burden. This approach assumes the rental amounts would be triple-net. In a triple-net lease the tenant pays the real estate taxes, and the percentage rent is adjusted to reflect local taxes on a case-by-case basis.

The taxpayer offered another, more reliable method, the "assessor's formula". This formula lets the assessor follow the law, which calls for like-kind properties to be equally and uniformly assessed. The formula takes into account the income stream, the cap rate and the tax rate.

For example, consider two identical properties a city block apart, but in separate tax districts. One district has high tax rates, and the other a low tax rate. Because the assessor's formula weighs all three elements used to arrive at market value, it produces fair tax assessments as opposed to a subjective adjustment that is not computed on a scientific basis.

The accompanying chart shows the difference in assessments when the assessor's formula is used instead of an ad hoc, subjective tax adjustment. The assessor's formula provides a superior method that both assessor and taxpayer can rely on.

MMartone_ColorMichael Martone is the managing partner of law firm Koeppel Martone & Leistman LLP in Mineola, N.Y. Michael Guerriero is an associate at the firm, the New York member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. They can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
24

New York Wrestles with 'Takings' Rulings

"In Kelo, the Court held that while government may not take one's property for the sole benefit of another private party..."

By Michael R. Martone, Esq., as published by Globest.com - July 2010

Constitutional limits on the government's power to take property for use by private entities for the public purpose of economic revitalization have been the subject of much debate in New York. The state has struggled to define itself in the wake of the Supreme Court's controversial 2005 ruling in Kelo v. City of New London, which sparked a national debate about the eminent domain power.

In Kelo, the Court held that while government may not take one's property for the sole benefit of another private party, it may do so for the public purpose of economic revitalization. The ruling deferred to the City's taking of private property for inclusion in its redevelopment plan, hoping to revitalize its depressed economy.

The Takings Clause of the Fifth Amendment of the Federal Constitution mandates "nor shall private property be taken for public use, without compensation." Kelo says that where a legislature adopts a comprehensive economic plan it determines will create jobs, increase revenues and revitalize a depressed area, the project serves a public purpose and qualifies as a permissible public use under the Takings Clause.

An outraged public ridiculed Kelo as a gross violation of property rights for the benefit of large corporations at the expense of individual property owners. Since the ruling, 43 states have taken legislative action limiting the use of eminent domain. New York, however, has been criticized for failing to take similar action.

Condemnation in New York

Under New York's Eminent Domain Procedure Law, the State must first conduct a public hearing and determine that a taking would serve a public purpose so as to qualify as a public use. Next, the State must provide the property owner with just compensation for property taken. Each step is subject to judicial review.

Historically, it is extremely difficult for affected property owners to challenge a finding of public necessity to prevent a taking. Courts generally defer to a legislative prerogative, and vague definitions of public purpose can be used to justify most seizures. The courts have scrutinized economic revitalization as a justifiable cause for seizure, however, property owners have challenged the power of the Empire State Development Corp. (ESDC) to force the sale of private property.

The ESDC, the state's development arm, can force the sale of property either for a civic purpose or to eradicate urban blight - amorphously defined as substandard and insanitary. Two recent decisions closely examined the ESDC's involvement with private development projects in the name of economic revitalization.

Atlantic Yards Project

In Goldstein v. NYS Urban Development Corp., the Court of Appeals upheld the ESDC's taking of private properties in Brooklyn for inclusion in a 22-acre mixed-use development project known as the Atlantic Yards. The project includes a basketball arena for the New Jersey Nets and 16 commercial and residential high-rise towers.

The ESDC relied upon studies finding that the area was blighted and warranted condemnation for development. The Court noted that the removal of blight is a sanctioned predicate for the exercise of eminent domain and rejected the challenge to the blight findings, accepting as reliable the comprehensive studies supporting the ESDC's determinations.

The Court said it must defer to what is the legislature's prerogative and may intervene only where no reasonable basis exists, which was not the case in Goldstein. The dissent invited close scrutiny of blight findings, arguing that the courts give too much deference to the self-serving determinations of the ESDC.

Columbia University Expansion

Meanwhile, in Kaur v. NYS Urban Development Corp., the Appellate Division rejected as unconstitutional the ESDC's takings to assist Columbia University in building a satellite campus in the Manhattenville area of West Harlem. The court denounced the ESDC's blight determination as mere sophistry that was concocted years after Columbia developed its plans. Citing a conflict of interest, the Court chastised the ESDC for hiring Columbia's own planning consultant to conduct the blight study.

The Court declared that as a private, elite institution, Columbia could not claim a civic purpose to its expansion sufficient to meet the public use standards. That the University was the sole beneficiary of the project is reason alone to invalidate the taking, the Court wrote, especially because the alleged public benefit is incrementally incidental to the private benefits of the project.

The State appealed and it remains to be seen how the Court of Appeals harmonizes the Appellate Division's aggressive Kaur approach with its own deferential Goldstein holding. The rights of property owners throughout the state hang in the balance.

MMartone_ColorCorrected

Michael R. Martone is the Managing Partner in the Mineola law firm of Koeppel Martone & Leistman, L.L.P., the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michael Martone can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. Michael Guerriero contributed to this column. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jun
24

New Appeal

Seeking Reassessment? Act Now, Tax Attorneys Warn

By Suzann D. Silverman as published by Commercial Property Executive, June 2010

With the Federal Reserve repeatedly calling attention to commercial real estate assets' decline in market value and reduced access to financing, taxing jurisdictions have shown greater openness of late to appeals for reduced property taxes. That trend has offered many owners some badly needed breathing room. But as municipalities themselves become more strapped for cash, winning tax appeals looks likely to become much more challenging.

The commercial property sector is a natural place for municipalities to look for revenue, noted Elliott B. Pollack, chairman of the property valuation department of Pullman & Comley L.L.C. and a director of the American Property Tax Counsel. After all, commercial properties already make up a large proportion of communities' tax bases, and most legislators would much rather hike taxes on a local office building than on their constituents.

Some states have enacted tax caps, according to Stephen Paul, a partner at Baker & Daniels L.L.P. and vice president of the Tax Counsel.

But those limits can be deceiving. In Indiana, where he practices, residents' taxes are limited to 1 percent of value, while apartments are capped at 2 percent and commercial property at 3 percent. The risk, Paul said, is that the greatest pressure to raise assessments will be on commercial properties, which have the highest ceiling by percentage.

And when property values do inevitably begin to climb, the raw tax liability will naturally rise with them.

Paul expects a surge in tax litigation to result, with local appeals becoming harder to win and a greater number reaching the state level.

Eventually, these cases will get a fair hearing, he believes, but that outcome may require a time-consuming, expensive effort by owners.

The steady erosion of municipal finances across the country presents an additional reason for concern, according to John E. Garippa, senior partner of Garippa Lotz & Giannuario and president of the Tax Counsel.

While bonding capacity should yield enough cash for municipalities to cover refunds, at least in theory, Garippa foresees potential for reductions in many municipalities' ability to bond. Legislation may also cause delays by extending the deadlines for municipalities to distribute tax refunds.

The predicted rise in interest rates is also likely to have an impact, he noted, driving cap rates up and asset values down. "That's why it's important for clients to be on top of this," he cautioned.

When it comes to property tax disputes, being on top of it means preparing in advance to appeal to ensure that deadlines are met, and then gathering the details necessary to persuade the court. While many property owners file appeals every year (most settle rather than try their luck in the backlogged courts), there are still a good number that do not, Garippa said. But with assessments based on the previous year's data, current assessments may not fully reflect the market downturn. That offers an opportunity to argue for an assessment decrease.

In New York City, for instance, the Real Property Income & Expense filings that the finance department required in 2009 were based on 2008 data, which did not reflect the full extent of the commercial real estate market crash that occurred at year-end 2008, explained Joseph Giminaro, special counselor & co-manager of the tax certiorari department for Stroock & Stroock & Lavan L.L.P. It is too soon to evaluate how the tax commission will view updated data, but Glenn Newman, president of the commission, has indicated that he wants to see all data that shows the difficulties property owners are enduring. "I think it's very favorable that the tax commission is openly saying it wants to hear these stories," Giminaro observed.

That positive attitude seems common nationally. Tax certiorari attorneys, who specialize in tax appeals, are achieving some significant reductions.

In the hospitality arena, for example, "it is not unusual to see total assessments drop by more than a third," said Garippa, who represents some of the nation's largest hotel operators. Big-box stores saw a similar drop in the past year, he noted. Pollack, too, has seen significant decreases; he reports that appeals for hotel properties are typically garnering tax reductions of 20 to 40 percent. And while hotel and retail properties have been subject to the largest overassessments, owners of other property types can also mount successful appeals. Older industrial properties are another big area.

Taxing jurisdictions typically have based value largely on income capitalization and replacement value, not comparable sales, but one area that offers growing potential to strengthen appeals is brand value, since so-called intangible benefits are not taxable. Retail and hospitality properties are the categories whose brand value is most readily recognized by tax courts, according to Paul. Part of hotels' income is derived from the flag, and shopping centers typically count on big-name stores to attract customers.

Mall owners have brought branding to a new level in recent years with efforts for company name recognition among consumers. Office property owners are newer to this strategy and have had less success. However, that will come with time, Paul predicted.

In the meantime, with data now available on the softer market and municipal difficulties looming, "now's the time to take a tax appeal," Paul said.

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Stephen H. Paul is a partner in the Indianapolis law firm of Baker & Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at stephen.paul@bakerd. com

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Elliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of the 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.

Garippa
John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jan
25

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..

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Dec
31

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..

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Apr
08

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..

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