"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.

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..

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.

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

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.

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.

"[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.

Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel, 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..

"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.

Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel, 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..

"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.

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

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

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

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

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

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

1. Abatement vs. Exemption

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

2. Reduction of Retail Eligibility

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

3. Reduction of Eligible Construction Period

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Challenging the sales approach can save you big bucks

By Elliott B. Pollack, Esq., as published by Apartment Finance Today, April 2007

In many parts of the country, multifamily properties are very hot and command extremely high sale prices. These transactions often make very little sense in terms of the underlying cash flow they can generate. Indeed, there seems to be a speculative fever abroad in the land, probably resulting from investors chasing this property category due, at least in part, to asset diversification needs and other financial asset motivations.

For example, an apartment property owner is not even thinking about selling her property. Then, she receives a telephone call from the assessor advising that her property assessment will increase because of recent sales of comparable properties at relatively stratospheric levels. Can this problem be managed? A recently published case illustrates that the answer to this question is yes. In that case, the approach employed by New York property valuation attorney William D. Siegel was to attack the assessor's sales comparison approach head on. In a tax appeal filed for a 276-unit garden apartment complex in Middletown, N.Y., the property owner challenged the $15 million value estimate offered by the assessor's appraiser, using the appraisal and trial testimony of this expert. The owner's appraiser placed the property's market value at $10 million.

The assessor's expert might have thought he was sitting in the catbird seat with a number of sales at high unit values. However, the property owner's appraiser, William R. Beckmann, located a number of different sales, which resulted in a far lower range of values per apartment unit. Beckmann went even further, though, rejecting the sales approach and resting his value estimate on the income capitalization methodology.

He maintained to the court that a detailed understanding of the income and expenses of the comparable sales used in the assessor's appraisal was absolutely necessary. Otherwise, there was no factual basis for concluding that the sales in the comparable~presented were, in fact, comparable to the owner's property. This litigation suggests that when assessors use the sales approach, owners may be able to challenge increased values by arguing lack of reliability in this approach.

When owners face high valuations based on the sales approach, they should rigorously explore the following questions:

Are the comparable sales relied upon by the assessor relatively recently constructed or older properties? If the sales relied upon by the assessor were relatively newly constructed, they will likely generate higher prices per unit than would a 30-plus-year-old property due to lower repair and replacement expectations.

Just because your local assessor relied on comparable sales to give your property a higher valuation and a bigger tax bill doesn't mean you should pony up without a fight. Take a look at the comps and see how comparable they really are: You may be able to successfully argue that properties built recently, featuring larger unit sizes, or selling with Effective local tax assumable financing were able to fetch much higher sales prices than your property rates are a critical could reasonably command.

What was the average square footage of the various units in these comparables? Average unit square footage is critical because, to a certain degree, larger apartments command higher rents and are easier to lease.

Were the buyers in these sales real estate investment trusts (REITS) or private investors? If many of the buyers in the assessor's sales were REITs, this is important to note because it is well known that investment trusts generally pay significantly more for property than do private investors. They can do this because of their lower cost of funds and financial market pressure to invest.

Was below-market-rate financing in place and assumable? Assumable below-market-rate financing would undoubtedly tend to increase the sales price because, in effect, the buyer's cost of funds is being subsidized by the assumable financing. (The same issue would arise in the event of significant seller financing in the sale.)

Are the capitalization rates apparently revealed by the assessor's sales fairly comparable to the rate which could be commanded by the property? The capitalization rates paid for more attractive, larger, more newly constructed properties tend to eclipse the rates associated with older property sales for many of the reasons discussed in this article. This is true even though cash-on- cash returns will not differ significantly.

Was there significant deferred maintenance? The existence of marked deferred maintenance will almost always affect the purchase price due to the investor's expectations that significant funds will have to be devoted to the property after purchase to bring it up to snuff.

What were the effective real estate tax rates in the communities in which the sale properties were located? Effective local tax rates are a critical element in determining sales prices because properties in low-tax towns tend to sell at higher unit values and at lower cap rates than do properties in more heavily taxed communities. Put differently, investors are frequently willing to pay more to be taxed less. While a number of these issues are beyond the knowledge base of the average property owner, expert appraisal, legal, and other market-oriented consultants' efforts may be helpful in distinguishing an owner's property from those sky-high sale properties relied upon by the assessor.

Of course, if an apartment complex stacks up favorably on most counts to the sales used by the assessor, there will be less running room within which to dialogue with the assessor.

Elliott B. Pollack is a partner at Pullman & Comley in Hartford, Conn. He is the Chairman of the firm's Property Valuation Department. Pullman & Comley is the Connecticut 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..

"For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2007

The Department of Finance does an abrupt about face by dramatically ratcheting up the new 2007/08 property tax assessments after issuing generally lower ones last year. This represents one of the largest leaps ever in hotel assessments.

The Finance Department raised the tentative hotel assessments citywide by an average of 35%. However, the increases were even more pronounced for some of the City's premier hotels. For example, the Marriott marquis saw an increase from $162.5 million to $227.2 million (an 80% change), the Grand Hyatt went from $75.1 million to $135.4 million, and there were over 40% jumps at The Pierre, Sheraton Manhattan, Le Parker Meridian, Waldorf, and Roosevelt Hotels. The outer boroughs were not spared either, as Brooklyn hotels' assessments increased by 74%. Queens hotels' assessments jumped by 34%, while Staten Island saw a 19% increase and the Bronx only experienced a 6% jump.

Some city newspapers speculated that industry leaders and consultants met with the City last year and convinced them to change the method of arriving at the assessed value for hotels. This new method may have contributed to the modest assessments for the 2006/07 tax year because the Finance Department was using only out-of-date 2004 filings, which covered a period when hotels were not doing as well as they are now. This year, by using current 2006 figures, the new methodology dramatically increased assessments.

For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate. Instead, some method of allocation or extraction had to be employed to remove the income related to furniture, fixtures and equipment and franchise and business value.

In New York City, assessors accepted this premise but chose different approaches over the years to accomplish the job. In some years, they deducted a factor for business value when using sales to value hotels. In recent years, since sales no longer form the basis for assessing most commercial properties, income capitalization has become the primary valuation method. Hotels were sometimes assessed by applying higher capitalization rates, sometimes by deducting business income and sometimes by applying an expense ratio of 75% to room revenues before capitalization. All these approaches have now been abandoned.

Under the new method, assessments are based on a unique gross income multiplier formula where room revenues are converted into market value. The record indicates that this formula is not used anywhere else in the country.

The first step in the new formula calls for estimating room revenue by taking the latest income statement and adjusting it upward to account for normal occupancy, alterations and so on. A percentage of food, beverage, conference and exhibit revenue is then added to this room revenue number. The total gross income thus derived is divided by 365 and then multiplied by 960 for luxury hotels. According to the Finance Department, this calculation provides a fair market value for the hotel's real estate. Should the hotel also contain apartments, retail, office, garage, signage/billboard, telephone or other income, the net income from these categories is then capitalized and added to the prior calculation. To determine the assessment value, the assessor multiplies by 45% the final number derived from these steps.

To illustrate how the new formula works, consider a hotel with a room income range of $295 to $371. The new formula puts the hotel's income at $475, with an estimated market value of 4456,000 per room, an assessment of $205,200 per room, and property taxes of $22,572 per room. These calculations give no effect whatsoever to the age and condition of the property, its franchise, its advertising budgets or whether it is a union or nonunion operation.

The unfairness and inaccuracies of this new method of valuing hotels are overwhelming, so much so that the assessors have already spoken our decrying this methodology and claiming it was a contrived deal made by a consultant and the industry leaders. The Chief reported in a May 2006 article that David Moog, the assessor's union leader, claimed the method violated good assessing practices and was an improper way to determine fair market value.

The views expressed in this article are those of the author and not those of Real Estate Media or its publications.

Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel, 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..